Beijing and its international competitors.
Despite many uncertainties about the country’s fiscal stability, particularly its debt-laden banking system that, in former Hong Kong governor Chris Patten’s phrase, ”makes Tokyo’s look like Zurich on a Sunday afternoon”, signs are accumulating that it will be years, not decades before the yuan joins the dollar, euro and yen as global money.
”It won’t happen within the next three years, but China has stated that it intends to make the yuan convertible. There is nothing to stop it becoming one of the major currencies,” said Chong-En Bai, professor of Economics at Hong Kong University.
”China’s rapid economic growth will continue and her trade with other countries continues to grow at faster pace than the 8% GDP.”
Right now, the dollar-pegged yuan is being blamed for America’s trade deficit and for exporting deflationary pressure. Many US commentators, ever wary of Chinese competition, want it floated or at least re-valued at some higher level.
However, parallel to arguments about its value, the growing international presence of the renminbi, as the currency is also known, is a new portent of Chinese dominance. Asia-experienced financial analyst Mark Faber calls it ”the strongest currency in Asia right now”.
Although China’s accession to the World Trade Organisation in 2000 formally started an integration programme, Beijing is hanging back on floating the currency to prevent destabilising price fluctuations and shield exporters in a transitional economy. However, when it fulfils its promise to float the currency in a few years, China – set to be the world’s top importer by 2005 and now the one single growth engine in a recession-struck world – will have a tool for the projection of its economic might.
The yuan is now limited by its exclusion from trades in shares bonds and other financial instruments, which comprise 90% of forex transactions. But as a prelude to convertibility, and regardless of current political tensions, Chinese money is now widely used in recession-hit Hong Kong, with estimates of about HK$30bn to HK$40bn ((pounds) 2.5bn to (pounds) 3bn) in circulation there.
Also with the rise of Chinese buying power, it is travelling in the pocket of the 16 million mainland Chinese who went abroad in 2002, with official limits on exporting the currency being tacitly ignored. Another novelty is that yuan are widely available in Asia’s bureaux de change.
Practised at turning a blind eye to politically sensitive but constructive developments, Beijing has allowed the development of a de facto yuan zone, along its southern border with Laos, Burma, Cambodia and Vietnam, admittedly marginal economies where the yuan is the preferred hard
substitute for skittish local
currencies.
At present, 40% of all of east Asia’s trade is inter-regional, with China making up about 40% of that figure. As trade links with China increase in importance, it seems increasingly likely that a free floating yuan will become the regional currency, reducing dependency on the dollar and the yen.
China, which posted gross domestic product equal to that of Italy, is expected to double in size by 2010, rivalling Germany, and possibly surpassing Japan by 2020.
However, the Japanese failed to build a yen trading bloc in Asia, largely because their banks over-lent and weakened their currency.
However, China has learned from its rival’s mistakes and is set to succeed where Japan failed in displacing the dollar as the common currency in Asia.
