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Thread: Rise of the Yuan as global reserve currency

  1. #1
    Turbanator Senior Contributor Double Edge's Avatar
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    Rise of the Yuan as global reserve currency

    Nalapat is back from a conference in Taiwan where war gaming US vs China was held and mentions what war planners from the two sides had to say

    Warzones heat up as US-China conflict continues | SG | Nov 16 2019

    In an actual contest, there will be only one winner. The game being played between the US and China is not Win-Win but Zero Sum, no matter how hard Donald Trump and Xi Jinping talk in the manner of best friends.

    Xi has a plan, supplant the dollar with RMB backed by gold and verifiable by block chain

    For the yuan to rise the global confidence in the dollar must drop, how or why will that happen

    - “unsustainable” level of US$260 billion that was printed by the Federal Reserve in just a 45-day period, which is more than twice as much as was printed during the period of Quantitative Easing III

    - The US Treasury under Secretary Steven Mnuchin has been increasing expenditure with cutbacks rather than increases in tax revenues. Such increases are funded through the printing of money by the Federal Reserve, cash that is then directed back to the Treasury, incentivising it to incur still more expenditure.

    - Planners fearing a US defeat (and there are several more such voices in 2019 than was the case in 2015) at the hands of China say that from August 2018, US tax receipts barely cover social security, medicare and interest on debt, leaving zero balance for other expenses, including the ballooning cost of defence. This would not have been a problem in a situation where the US dollar rules the financial markets, except that external demand for US dollars has been going down since 2015, while even domestic buyers appear to have begun the process of bailing out of US dollar holdings during the final months of 2018.

    - The 2013 and 2017 “weaponizing” of the US dollar against Iran (when that country was deemed to be compliant in the obligations Teheran undertook in the Joint Comprehensive Plan of Action) has had the collateral effect of sharply lowering confidence in the US dollar as a global reserve currency, for fear that such weaponization of the currency for political reasons may impact other countries as well. The expectation of those pessimistic about the US side prevailing in the contest with the PRC is that there will be a substantial depreciation of the US dollar within the next term in office of the President of the US, whether this be Trump or another individual.
    So now the dollar has had a correction what does China do

    - Since President Xi took office in 2012, the PRC has bought gold on an unprecedented scale, purchasing about 30-50 tonnes each month, while at the same time producing more gold domestically than any other country, none of which is allowed to be exported. The present gold reserves within the control of the authorities in China are estimated to be as high as 15,000 tonnes, with some estimates breaching the 20,000 tonne mark.

    - Combined with the move by Xi Jinping to install Blockchain technology within the monetary system, the opinion of war planners and forecasters is that China is positioning itself to make an RMB “backed by gold and verifiable by Blockchain the safest reserve currency in the world once the US dollar gets toppled”, according to a war planner who studies developments in the PRC from his home base.

    - Asked about the problems created by the enormous debt burden in China, the response of planners pessimistic about US prospects for victory (especially in the context of India adopting a non-aligned policy during the conflict) was that “the communist state owns all the land in the country”, and that such a holding provides a reserve to sustain even so large a debt. “So long as its citizens have confidence in the longevity of the rule of the CCP, the leadership core will have the means to ensure that a meltdown in the economy does not take place”, an analyst temporarily based in Hong Kong stated.

    - Meanwhile, the Chinese leadership has not been complacent of the dangers facing its continued control. In a sign that he recognises that the 21st century requires a paradigm change in economic and financial policy, President Xi Jinping declared on 22 October that adoption of Blockchain technology would form part of the core of state policy. The Peoples Bank of China has unveiled a Digital Currency Electronics Payment system that has been reinforced by the PRC’s new cryptocurrency law. Together with advances in Artificial Intelligence (which relies less on innovation than on continuous and massive inputs of data) and bio-technology, Xi Jinping is seeking to convert China into a global technological powerhouse that will far outstrip the US

    - According to the war planners spoken to, the Belt & Road Initiative “has become a method for China to exchange soon-to-depreciate US dollars into physical assets” in a range of countries. Countries involved in the BRI incur debts to China that finally get repaid by transfer of assets to PRC entities, as has recently happened for example in Sri Lanka. Thus, US dollars (the currency mostly used for BRI financial computations) are being exchanged for physical assets that can collectively add to China’s ability to replace US-controlled global supply chains with their own.

    - At the same time, China has become a key holder of Bitcoin, even while Indian monetary authorities seek to roll back the waves in the manner of Canute by passing an impossible to enforce law banning bitcoin. China sought to do the same in 2017 and quickly reversed course once the CCP leadership understood both the impossibility of such a prohibition as well as the advantages of being a world leader in a currency of the future attuned to internet-enabled systems and processes.
    It seems the arguments are China top heavy here. More KMT supporters attended this conference i guess.

    China's problems are surmountable yet for some reason the American problems are not (!)

    China got all this whizz bang tech and what do the Americans have ? mag stripe cards and currency made out of fabric. Sooooo last century : D

    Buying Yuan is fine if all you do is trade with China and that trade makes up the major share. For everything else people want dollars. Countries that are not in the hock to China won't get into yuan. And why would you get into yuan in the first place if the only recipient is China. If anything there would be active resistance here as it limits options. Holding yuan is a trap, once you enter, harder to come out.

    The oil & gas exporting countries sell in dollars, they will never be in debt to China so there is zero incentive or reason for them to start asking for yuan instead.

    Even if global confidence in the dollar takes a dip and demand is less the question is what next and why is that better than what we already have. I don't find answers to that in this article. The gates of heaven open and people run rushing into the welcoming arms of the Chinese ?

    Yuan as a viable alternative is one thing, people actually switching over quite another. There would have to be compelling reasons to do so and for reasons mentioned i just can't see it happening unless there is more to this story.

    Americans have been told they were doomed for close to a century now. There was this depression, then WW2, the reds are coming, nuclear armageddon, global terrorism, climate change and now its back to the reds are coming. They will get over this one too. yes? And if they could do that without blowing up every body else that'd be cool.
    Last edited by Double Edge; 08 Dec 19, at 23:36.

  2. #2
    Senior Contributor Oracle's Avatar
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    It's not Yuan. They're working on a cryptocurrency, and with the length and breadth of their trade monopoly they're figuring out if the $ can be replaced. There is already the decentralized Neo.

    Paper currency is passe, 17th century'ish. Think of Blockchain & Cryptocurrency, and how it might replace government oversight, particularly the United States.
    Politicians are elected to serve...far too many don't see it that way - Albany Rifles!

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    Senior Contributor DOR's Avatar
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    “Xi has a plan, supplant the dollar with RMB backed by gold and verifiable by block chain.”

    I assume this is a scenario, because if it were thought to be fact, there would need to be an official source for such a statement. China has repeatedly said a lot of things that might be construed as meaning “WTF? Why in the world would we want to lose control of our own money supply and currency value by it becoming ‘the’ global reserve currency?”

    Then there’s the problem of no modern reserve currency ever existing without the rule of law, an independent judicial system, and an independent central bank. Kinda hard to enforce a derivitives contract via an appoined, CCP judge who’s under instructions to protect the Party, and State.
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    Turbanator Senior Contributor Double Edge's Avatar
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    Quote Originally Posted by DOR View Post
    “Xi has a plan, supplant the dollar with RMB backed by gold and verifiable by block chain.”

    I assume this is a scenario, because if it were thought to be fact, there would need to be an official source for such a statement.
    Wargaming scenario


    China has repeatedly said a lot of things that might be construed as meaning

    “WTF? Why in the world would we want to lose control of our own money supply and currency value by it becoming ‘the’ global reserve currency?”
    Can you mention some instances where they have said that ?

    I hear many reports where countries are trading in yuan. I take this to mean nothing more than China giving out IOU's that can then be exchanged at the BOC for Chinese goods.

    Then there’s the problem of no modern reserve currency ever existing without

    - the rule of law,
    - an independent judicial system
    - an independent central bank.

    Kinda hard to enforce a derivitives contract via an appoined, CCP judge who’s under instructions to protect the Party, and State.
    Heh, that's three show stoppers in a row.

    All to do with the most important element of any currency.

    Trust.
    Last edited by Double Edge; 31 Dec 19, at 18:25.

  5. #5
    Senior Contributor DOR's Avatar
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    No examples at hand just now (travelling).

    Did I mention reserve currencies tend to be fully convertible on the current, capital and all other accounts?
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  6. #6
    Turbanator Senior Contributor Double Edge's Avatar
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    Quote Originally Posted by DOR View Post
    Did I mention reserve currencies tend to be fully convertible on the current, capital and all other accounts?
    Very good. Fourth show showstopper. This one is particularly difficult to overcome

    Don’t hold your breath for the yuan to be convertible, as stability trumps all in the Chinese Dream | SCMP (op-ed) | Oct 27 2017

    Two year old article

    Full convertibility of the renminbi, also known as the yuan, has long been one of China’s critical Don’t Hold Your Breath initiatives. The People’s Bank of China, as the country’s central bank is called, first committed to a fully liberalised capital account during the 1990s.

    In 2010, it moved the target to 2015 for a full opening. According to the central bank’s Deputy Governor Yi Gang - who spoke at a New York conference as recently as April - full convertibility is now scheduled for 2020.

    Personally, I don’t think it’s going to happen before 2030.
    We're in 2020 now and yuan is still not fully convertible yet. Why ?

    The problem is, if China allowed convertibility sooner rather than later, it’s likely that a wall of capital held by nervous depositors would be lined up ready to flee the banking sector as soon as it - and they - were able.

    Why? Because despite official measurements of non-performing loans, the asset quality of China’s banks is questionable to some, worrisome to others.

    If you were a retail depositor in one of China’s banks, I’m guessing you’d be happy to allocate a portion of your savings offshore for purposes of improved return and diversification. To put it mildly, this potential magnitude of capital flight would not be conducive to China’s existing growth model.
    Capital would flee first before it can be attracted back. This is the weird thing about China. For all the economic prowess there is still a tendency for capital flight.

    Because capital cannot flee it means China cannot attract what it should for such a large economy

    with a non-convertible currency, attracting capital is difficult and partly explains why - notwithstanding China’s mighty economic heft - its stock market accounts for less than 9 per cent of global equity capitalization, three times smaller than the United States. Put another way, China is an economic superpower with the capital market of a financial minnow.
    Nice catch 22.

    The renminbi’s convertibility will happen, but at a pace and time frame which answers to a political imperative rather than necessarily a free market dynamic.
    Ok, so when ?

    Globaltimes to the rescue with positive statements. Road ahead is filled with brightness, we have a dream...

    Yuan set to be fully convertible in five years | GT | Nov 02 2017

    Another two yr old article that pushes the date to 2023

    China has entered a new era in building socialism with Chinese characteristics. In the economic arena, the new era means China will be more open and the economy will be more vibrant. The next five years will also see China further open up its financial sector and the changes in the financial system will be unprecedented.

    First, the role of finance will change fundamentally. Financial markets, previously focused on fundraising, will increasingly sway toward capital raising as well as wealth management. This means the capital markets will play a much bigger role.

    Second, China's yuan reform will be finished over the next five years. By then, the Chinese currency is expected to be fully convertible, laying the groundwork for the yuan's growing role as an international reserve currency.

    Reforms of the international currency regime are also considered a significant task in the next five years. As part of the reformist drive, the yuan will apparently have growing clout and will have greater weight in the international currency regime. This signals not merely a heftier weighting for the Chinese currency in the IMF's Special Drawing Rights (SDR) currency basket, but also the yuan will be more widely used as a global reserve currency as well as having increasing importance in trade settlement.
    They already foresee yuan as global reserve currency by 2023. But having more clout means yuan appreciates and they don't necessarily want that for exports.

    We have a financial dream that the yuan will be truly internationalized. It is hoped that one day we will be able to take yuan to every corner of the major continents and convert it into whatever currency we might need. This, however, requires careful observation of any problems that might occur during the course of the yuan's internationalization.
    I have a dream : D

    It's unlikely that the yuan's internationalization will happen without a hitch. There will be constraints, both internally and externally.

    The major internal factor that may affect the yuan's internationalization is the issue of ensuring the currency's long-term credibility, which is essentially about reassuring the markets that the yuan is reliable, stable and an asset that will hold its value.

    This will surely entail efforts to improve the country's legal environment. In order to protect the yuan's long-term credibility, offering runaway credit as a means of steadying short-term economic growth needs to be avoided. In addition, a balance needs to be struck between actions to stabilize the economy in the short term and efforts to maintain the yuan's creditworthiness over the long term.
    So that is one showstopper being looked at. Legal environment ie rule of law. This will have to include independent judiciary but if political imperatives dominate then the requirement of an independent judiciary will not be satisfied.

    Meanwhile, the yuan's internationalization is also subject to extensive external pressure, primarily coming from the US dollar. The yuan will become a significant global reserve currency in the future, but it's not supposed to replace the dollar.
    Interesting, so their ambitions are modest for now. This is the CCP saying they will not be challenging the dollar any time soon.

    Third, the country is poised to finish internationalizing its financial system. China's financial markets will be part of a new global financial hub, one of the essential characteristics of a world power such as China. Each of the countries at the top of the global financial power system are home to globally recognized financial centers.

    As China inches closer to the center of the world stage, its financial system and financial markets will surely become the new focus across the globe. Shanghai and Shenzhen are expected to be the country's new financial hubs that will serve as the epicenter of trade and allocation of yuan-denominated assets. They are also set to play a vital role in global asset allocation that will include dollar assets.
    Cannot attract capital unless the yuan is convertible. Without more capital China's capital markets remain minnow sized.

    GT isn't accounting for the Trump factor

    Trump’s policies make a fully convertible yuan by 2020 impossible, say financial experts | SCMP | Jan 11 2018

    Another 2 yr old article

    A stronger US dollar would lead to depreciation of the yuan, which would create an adverse effect on the internationalisation of the currency. A fall of the yuan against the US dollar, such as what we saw in 2015 and 2016, makes investors less interested in buying dim sum bonds. China would also need to bring in measures to restrict capital outflows.”

    The yuan’s 7 per cent slide against the US dollar in 2016 sparked a tide of funds leaving the mainland as individuals and companies ploughed money into insurance policies, properties, stocks and other assets in Hong Kong and overseas to hedge against the falling currency.
    Bingo! now we know why Chinese are buying property in NZ.

    Since late 2016, Beijing has introduced a string of measures to restrict capital outflows. Meanwhile the People’s Bank of China has tightened its control of the fixing rate of the yuan, a move that brought some stability to the currency. The yuan rose 6.8 per cent against the US dollar in 2017.
    Restrict capital outflow to stabilise the yuan. Restricting outflow means capital markets cannot grow.

    How to solve yet another conundrum.

    Maintain yuan stability in the face of rising dollar value ?

    The rest of the world has begun to accept the yuan more readily. A major breakthrough came in December 2015 when the International Monetary Fund decided to include the yuan in the Special Drawing Rights, bestowing upon it the status of a reserve currency like the US, euro, pound and yen.
    And that is where the talk of the yuan as a global reserve currency stems from.

    Frank Newman, chairman, China, of Promontory Financial Group and former deputy secretary of the US Department of the Treasury, said the yuan would find it hard to compete with the US dollar as a leading reserve currency as there are a lot of foreign investors holding more than US$35 trillion of dollar-denominated assets.
    Another headache. Dollar has the first movers advantage.
    Last edited by Double Edge; 03 Jan 20, at 15:43.

  7. #7
    Turbanator Senior Contributor Double Edge's Avatar
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    Quote Originally Posted by DOR View Post
    China has repeatedly said a lot of things that might be construed as meaning “WTF? Why in the world would we want to lose control of our own money supply and currency value by it becoming ‘the’ global reserve currency?”
    Seems like something the central bank would say. A central bank that is anxious over capital flight and having to deal with dollar pressure. A ccentral bank that is uncertain over how it can maintain the stability of its currency.

    The EU's central bank has just one job, control inflation.

    The Fed has a secondary responsibility, maintain the stability of the dollar.

  8. #8
    Senior Contributor DOR's Avatar
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    Until and unless the PBoC Governor announces that full capital account liberalization will start at 9:00am THIS morning, don’t hold your breath. There is an extremely large and strong segment of any leadership coalition – including seemingly one-man dictatorships like Xi Jinping’s – that hates the idea of giving up any degree of authority or power over any part of the economic, social, or political system.

    And, if it involves giving up power to foreign institutions or markets, that coalition grows larger and stronger.

    .

    Given the near-total lack of value to the Chinese economy of the Rmb becoming a reserve currency, I do not recommend suspending respiration until it happens.

    Having said that, bear in mind that anyone and everyone who cannot figure out how to get significant amounts of Rmb converted to dollars and out of the country isn’t really trying. Chinese currency controls make a sieve look like a soup bowl. The only ones complaining are those that play by the rules … foreign financial institutions and investors.

    .

    From March 1998 to September 2019, net errors and omissions averaged $7.1 billion per quarter, for a total of $145 billion. That’s just the official data, and the range is from +$37.8 billion to -$88 billion.

    So, how efficient were those capital controls in response to the 2016 surge in out-flows? Since 2017, the total has been $563.6 billion.
    https://www.ceicdata.com/en/china/ba...-and-omissions

    Remember, capital flight (E&O is a proxy) is a net figure. Foreign inward direct investment figures are still massive, and much longer term than the bulk of the capital outflows (legitimate or otherwise).

    .

    Interesting that in the middle of a paragraph about globalizing the financial markets they are still talking about Shanghai and Shenzhen being the “epicenter of trade and allocation of yuan-denominated assets.” In other words, international financial liberalization ain’t gonna happen.

    Resume respiration.
    Trust me?
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