April 1st 2009
Chinese Yuan Vies for Reserve Status
Having appealed unsuccessfully to the G20 to create a viable reserve currency, China is now taking matters into its own hands, by pushing the Chinese Yuan as a viable alternative.
Earlier this week, it signed a $10 Billion+ swap agreement with Argentina, involving an exchange of Argentine pesos for RMB. The agreement is ostensibly designed to benefit Argentina, whose economy has been hit hard from the global credit crisis: “The peso has been weakening slowly but consistently since mid-2008, when a major farm strike here spooked investors and led many Argentines to trade in their pesos for dollars.” By guaranteeing a large quantity of RMB – which is generally considered undervalued- China is effectively providing the peso with more solid backing.
In actuality, the swap was probably proposed by China in order to demonstrate its sincerity in seeing the Dollar replaced as reserve currency. Especially among developing countries and/or Asian countries, many of which represent major trading partners, China is keen to increase the supply of Yuan. One analyst wrote that ” ‘We expect more agreements with other emerging market countries will be in the pipeline,’ as the swaps will help ‘Chinese slumping exports by making access to finance easier.’ ” Accordingly, the swap agreement with Argentina represented the sixth bilateral currency agreement signed by China in recent months. The other five countries are Belarus, South Korea, Hong Kong, Malaysia, and Indonesia, with the total nominal swap value of nearly $100Billion ($650 Billion RMB).
China is also moving to make the Yuan fully convertible, such that it can be exchanged freely both inside and outside China. It is intended that Chinese banks and exporters, for example, will now be able to accept payment directly in foreign currencies, rather than first being forced to convert them into RMB. In addition, the government “will triple the amount of domestic securities that overseas funds can buy under the qualified foreign institutional investors program to $30 billion” in order to make it easier for foreigners to invest directly in China.
While the moves announced so far are too small to make any meaningful waves in the forex world, investors seem generally supportive of China’s efforts. Remember that only two years ago, hedge fund manager Jim Rogers famously announced that the RMB was due to appreciate 500% over the next couple decades and subsequently moved much of his personal savings into RMB-denominated bank accounts.
A recent note by Citigroup analysts perfectly encapsulates this sentiment: “In the longer term, we think it is China’s strategic economic and political interest to promote the broader use or internationalization of CNY. While the internationalization of CNY has a very long way to go, we see China as using the global crisis as an opportunity to take early steps.” Of course, China itself is conscious that such a process will require decades to complete, but it remains cautiously optimistic: “It’s not really up to China to determine this. It’s up to the market…The best the government can do is to permit yuan-denominated trade. And then it’s up to the market to decide whether it wants to use that.”