I think that China is trying to assuage US fears with this first
piece, particularly in light of this morning's article in the NYT
regarding China's moves to make the yuan a regional (if not global)
currency.
http://www.reuters.com/article/marketsNews/idUSL570633320090705
China says dollar to remain leading world currency
Sun Jul 5, 2009 2:42pm EDT
* Vice minister sees dollar pre-eminence for years to come
* Idea of new reserve currency is 'academic discussion'
* China appreciates U.S. govt efforts for stable dollar
(Adds details, quotes, background)
ROME, July 5 (Reuters) - Chinese Vice Foreign Minister He Yafei said
on Sunday the U.S. dollar would continue to be the world's leading
reserve currency for years to come.
"The U.S. dollar is still the most important and major reserve
currency of the day, and we believe that that situation will continue
for many years to come," He told a news briefing in Rome before this
week's Group of Eight summit.
Beijing has floated the idea of an alternative to the dollar as global
reserve currency and wants the topic broached at the summit starting
in Italy on Wednesday.
The vice minister said Chinese officials had voiced concern about the
safety of the country's dollar-denominated assets. "That is natural,"
he said.
He said many other countries over the years had been calling for the
stability of the U.S. dollar. "We appreciate the efforts made by the
U.S. government in that direction," he said, adding that it was the
responsibility of the government issuing the reserve currency to
maintain its stability.
He said discussion about reserve currencies had intensified since the
outbreak of the global financial crisis, which he said had revealed
"many shortcomings in the international monetary system".
However, he described this as an intellectual debate.
"You may have heard comments, opinions from academic circles about the
idea of establishing a super sovereign currency. This is all, I
believe, now a discussion among academics. It is not the position of
the Chinese government."
Zhou Xiaochuan, head of the Chinese central bank, launched the reserve
currency debate last March when he said the SDR, the International
Monetary Fund's unit of account, might one day displace the dollar.
Some diplomats and bankers suggest Zhou's primary aim was to highlight
attention on concern expressed by Premier Wen Jiabao about the safety
of China's huge dollar holdings -- at risk if U.S. policy turns to
greater tolerance of inflation.
Bankers reckon China holds perhaps 70 percent of its $1.95 trillion in
official currency reserves in the dollar. (Reporting by Silvia Aloisi,
editing by Mark Trevelyan)
http://www.nytimes.com/2009/07/07/business/global/07yuan.html?ref=global-home
July 7, 2009
Chinese Currency Used for Some Foreign Payments
By KEITH BRADSHER
HONG KONG — Banks in China and Hong Kong began wiring Chinese renminbi
directly to each other on Monday to settle payments for imports and
exports, as China took another step toward establishing the renminbi
as a global currency — and, eventually, an international alternative
to the dollar.
China has tempered its recent calls for a global reserve currency
other than the dollar going into a meeting of the world’s major
industrialized countries and biggest emerging economies in Italy on
Thursday. He Yafei, China’s vice foreign minister, said on Sunday that
the dollar would remain the world’s dominant currency for “many years
to come.”
But the Chinese government is accelerating the process of making its
own currency, the renminbi, more readily convertible into other
currencies, which gives it the potential over the long-term to be used
widely for trade and as a reserve currency.
The day that the renminbi is fully convertible — more than a few years
away, but perhaps less than a few decades — will most likely mark a
huge shift in global economic power, and a day of reckoning of sorts
not just for China but also for the United States, which will no
longer be able to run up huge debt without economic consequences.
Despite the slow, cautious pace at which China is moving, few experts
on Chinese monetary policy doubt that the long-term direction of
policy is toward strengthening the renminbi as an alternative to
industrialized countries’ currencies.
“To many minds here in China the U.S. dollar’s time is almost up,”
wrote Stephen Green, an economist in the Shanghai offices ofStandard
Chartered, in a research note last Thursday. “The euro zone suffers
from political paralysis and a too-conservative central bank, while
two decades of economic stagnation and a shrinking population do the
yen no favors.”
For decades, China has shielded the renminbi behind high barriers .
Authorities in Beijing prevented sizable amounts of the currency from
building up beyond China’s borders to allow them to control the
exchange rate and tightly regulate the financial system.
By keeping the exchange rate low, China keeps its exports competitive.
But, as a result, almost all payments for China’s imports and exports,
as well as international investment in China and Chinese investment
abroad, are made in dollars. Smaller sums cross China’s borders as
euros and yen, but seldom renminbi.
China is now starting to tear down these walls and free the renminbi —
a decision driven partly by recognition of China’s rising role in the
world economy and partly by disenchantment with the currencies and
financial systems of the industrialized world during the current
downturn.
“China definitely wants to reduce its dependence on the U.S. dollar,”
said Xu Xiaonian, an economist at the China Europe International
Business School. “Given the quantitative easing of the Fed and the
risk of worldwide inflation, it is understandable why China would want
to accelerate the convertibility of the renminbi.”
China’s leaders tend to plan far ahead, however, and full
convertibility for the renminbi is likely to take years, said three
people who have discussed the issue with China’s central bank policy
makers. All three said that China’s recently announced goal to turn
Shanghai into an international financial center by 2020 meant that
China probably wants a renminbi that is fully convertible into other
currencies by then.
Full convertibility is necessary for other countries’ central banks to
hold renminbi in their foreign exchange reserves instead of the
dollar, but not sufficient by itself. China also needs to show long-
term economic and financial stability — something it has demonstrated
over the past year in greater abundance than most countries.
Currency specialists and economists estimate that China still holds
close to three-quarters of its $2 trillion in foreign reserves in the
form of dollar-denominated assets. But these holdings have nearly
stopped growing since the global financial crisis began last
September, as Chinese authorities have also shifted away from the
longer-maturity bonds and the securities of government-sponsored
enterprises like Fannie Mae, and toward shorter-dated securities,
especially Treasury bills.
Zhou Xiaochuan, the governor of the People’s Bank of China, called
this spring for a greater role in the global financial system for
special drawing rights, a unit of account used in dealings with the
International Monetary Fund. But Mr. He, the vice foreign minister,
said on Sunday that such discussions were an academic exercise.
Eswar S. Prasad, the former head of the I.M.F.’s China division, said
that senior Chinese central bankers had told him that Mr. Zhou’s
suggestions about using special drawing rights as a kind of global
currency were intended to stimulate debate, and that China’s main goal
is to enhance the role of its own currency.
“The Chinese authorities see full convertibility as a long-term
objective, recognizing this is essential for the renminbi to become an
international reserve currency,” Mr. Prasad said.
Full convertibility of the renminbi is not an unalloyed benefit for
China, because it would be harder, although not impossible, for
China’s central bank to continue controlling the currency’s value in
terms of the dollar. A sharp rise in the renminbi could drive
thousands of export factories out of business and cause large-scale
layoffs, which the Communist Party fears as potentially destabilizing.
A more volatile currency would also require Chinese businesses to
develop more sophistication in managing risk, and most likely involve
heavy losses along the way among those that fail to do so.
In the last several months, Beijing authorities have begun moving to
let central banks from Argentina to Malaysia settle payments in
renminbi with China’s central bank. On Monday, the Chinese government
moved gingerly toward allowing the private sector to handle more
renminbi beyond mainland China’s borders.
The program introduced on Monday is restricted to companies in
Shanghai and in the biggest cities of Guangdong Province, a center of
exports next door to Hong Kong. Companies in these cities are now
eligible to send or receive payments in renminbi with customers or
suppliers in Hong Kong, Macao and Southeast Asia.
But each transaction is also coordinated with Chinese customs
officials, to make sure that the goods being paid for actually crossed
the country’s borders, and with Chinese tax authorities, to make sure
that all taxes on the transaction were paid. Together with China’s
large trade surplus, which means that currency tends to flow into
China instead of out, these measures could limit the buildup of
renminbi outside China’s borders for now.
Chinese exporters have been eager to see the renminbi used more widely
for trade — particularly after many suffered losses a year ago, when
the Chinese authorities allowed the renminbi to rise 8 percent against
the dollar from December, 2007, until the exchange rate was frozen
through market interventions in late July 2008. That rise in the
renminbi hurt Chinese companies that had signed contracts to export
goods for payments in dollars, only to find that those dollars did not
go as far as they hoped in covering expenses incurred in renminbi.
“Expanding the renminbi usage area and making it more flexible is
great news as we sell a lot to various countries overseas — this
should also remove the risks associated with currency fluctuations,”
said Wang Yapeng, a sales manager at Shanghai Electric International
Economic and Trading Company Ltd., which exports a wide range of
machine parts.
Shanghai Electric was one of the first companies to transfer money
using the new trade system on Monday, with its Hong Kong affiliate
sending renminbi to pay for a shipment from Shanghai.
The Bank of China, the state-controlled bank that has traditionally
been the most active mainland Chinese bank, handled some of the first
transactions, including Shanghai Electric’s. But international banks
are also allowed to participate, with HSBC announcing on Monday that
it had also been certified to handle the transactions.
Mainland Chinese banks have long moved renminbi in and out of the
country on a limited basis for technical reasons, using their own
offshore subsidiaries. But the new system creates a regulatory system
and allows exporters and importers to control payments for the first
time._______________________________________________
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