Renminbi me? China’s strealth bid for currency status
This is a short extract from a very interesting piece. It talks about some of the privileges that come from having a country with reserve currency status.
“Britain and China took fresh steps to improve their economic relationship on Thursday, agreeing to boost Chinese infrastructure investment in the UK and London’s role as an offshore trading centre for the renminbi… [China has given] formal backing to moves by UK banks and financial institutions to develop the UK as an offshore financial centre for renminbi trading.”
Two years ago, China started allowing ‘offshore’ trade in renminbi in Hong Kong to settle Chinese trade. This follows moves back in 2004 to let Hong Kong residents open limited renminbi bank accounts. China’s aim is to maintain strict capital controls – which Chinese leaders will tell you are a key ingredient in China’s growth miracle – and yet also allow the currency to trade freely, offshore, insulated from the mainland economy. To have its cake and eat it.
The ultimate end goal of all this is to see the renminbi attain global reserve currency status.
This is a little like what the United States did from the 1960s and 1970s: it was rather tolerant of the offshore London-centred Eurodollar markets, despite all the disruption they were causing, because it helped keep the U.S. dollar as a highly liquid global currency, an essential pre-requisite for its status as the global reserve currency of choice. Having a reserve currency gives a country an ‘exorbitant privilege‘ allowing it to, in essence, print unlimited money at home to pay for foreign escapades. In America’s case, the Vietnam War was a key issue to pay for at the time (read all about it in Treasure Islands). (Trading in your own currency also helps you sidestep currency risk.) In China’s case today there is no big war to pay for – but it’s going to be a highly useful tool generally in future. With London’s help, China hopes it can allow renminbi to be traded ‘offshore’ – now in Hong Kong and London – and yet hold onto those tight capital controls.
This is a major milestone in a gigantic story that has only just begun.
All this will have powerful impacts inside China (see this thought-provoking piece, for instance, for some ideas of what may be happening.) In the case of the U.S. the policy of tolerance of the offshore Eurodollar worked in the short term – but as Treasure Islands explains – it rebounded on the United States in unexpected and unpleasant ways, notably (but not only) in massively boosting the powers of Wall Street and its ability to capture the policy-making apparatus in Washington. It’s not beyond the realms of imagination that something similar might happening in China in future.
Read more at treasureislands.org
And there’s another thing. Offshore renminbi trade is, presumably, going to be massive. According to the Hong Kong Monetary Authority, the percentage of Chinese trade settled in Renminbi (via Hong Kong) rose from 0.7 percent in the first half of 2010 to seven percent in the first half of 2011. What a leap. Zhou Xiaochuan, governor of the People’s Bank of China, said that said that the offshore renminbi market was “developing faster than what we had imagined.” Indeed – just like the Eurodollar market, and offshore markets more generally. Give them an inch, and they will soon take over everything. You can’t really control ‘em. That’s the whole point about offshore, really: they are about escaping from control.