Asian economies turn to yuan
Posted by seumasach on October 24, 2012
24th October, 2012
A ”renminbi bloc” has been formed in East Asia, as nations in the regionabandon the US dollar and peg their currency to the Chinese yuan — a majorsignal of China’s successful bid to internationalize its currency, a researchreport has said.
The Peterson Institute for International Economics, or PIIE, said in its latestresearch that China has moved closer to its long-term goal for the renminbi tobecome a global reserve currency.
Since the global financial crisis, the report said, more and more nations,especially emerging economies, see the yuan as the main reference currencywhen setting their exchange rate.
And now seven out of 10 economies in the region — including South Korea,Indonesia, Malaysia, Singapore and Thailand — track the renminbi more closelythan they do the US dollar. Only three economies in the group — Hong Kong,Vietnam, and Mongolia — still have currencies following the dollar more closelythan the renminbi, said the report, posted on the institute’s website.
The South Korean won, for example, has appreciated in sync with the renminbiagainst the dollar since mid-2010.
China has long vowed to raise its currency’s global sway, along with the rise ofits economy, which became the world’s second-biggest last year.
The goal has seen significant development in recent years as the countrypromotes renminbi-denominated cross-border trade and gradually loosenscontrol over its capital accounts.
As a result, Hong Kong has quickly risen to be the world’s biggest offshorerenminbi trading center, with about 600 billion yuan ($95 billion) in deposits.
According to the latest report by the Society for Worldwide Interbank FinancialTelecommunication, or SWIFT, renminbi-denominated trade accounted for 10percent of China’s total foreign trade in July. The figure was zero just two yearsago.
From July 1 to Aug 31, global payments in the renminbi rose 15.6 percent,according to SWIFT, as payments in other currencies fell 0.9 percent onaverage.
The renminbi had a market share of 0.53 percent in August and has overtakenthe Danish krone to become the 14th-highest global payment currency, themember-owned cooperative said.
Cross-border trade settled in renminbi will triple to 6.5 trillion yuan ($1.03trillion) within three years as relations with the world’s second-largest economygrow, Royal Bank of Scotland Group PLC was quoted as saying by Bloombergon Oct 9.
Settlements will grow 12 to 20 percent this year, reaching $1.03 trillion in twoyears, up from $330.8 billion in 2011, said Janet Ming, head of the China deskfor RBS in Europe, Middle East and Africa.
“We’re seeing a lot more customers starting to practice in renminbi,” Ming wasquoted as saying by Bloomberg. “For most companies and banks, China andIndia is where the growth is. If you’re dealing with China, ignoring renminbi is notthe right thing to do.”
Wang Jianhui, chief economist with Southwest Securities Co Ltd, agreed. “Investors are looking for new reserve currencies at a time when both the dollarand euro are under pressure. This is a good opportunity for the yuan,” he said.
The Royal Bank of Scotland predicted in a report on Monday that renminbi willbecome a fully convertible currency in 2015.
The PIIE said that renminbi could rise to the status of an international currencyin 10 to 15 years if the country can reform its financial market and allow greateraccess for foreigners via capital account liberalization.
Forming the new renminbi bloc is the result of China’s rise as the main tradingpartner in the region. China’s share in East Asian countries’ manufacturing tradehas risen from 2 percent in 1991 to about 22 percent this year, according to thePIIE report.
In fact, trade is also propelling the rise of the renminbi outside East Asia. Thecurrencies of India, Chile, Israel, South Africa and Turkey all now follow therenminbi closely, in some cases, more so than the dollar. The renminbi wouldbe more attractive if the country could further liberalize its financial andcurrency markets, the report said.
Some fear that China might follow Japan’s rise and fall over the past decades,but the institute thinks otherwise.
“They should take note that even during the heady days of the Japanesemiracle, the yen never came close to rivaling the dollar as a reference currency.There was never anything close to a yen bloc in East Asia,” the report said.