China knows that, as one of the few countries growing this year, it is looked upon as the saviour that can pull the world out of a recession. What better time, then, to peddle its own currency? But China may well discover a few internal contradictions.
That’s the background with which one can view China’s announcement on Tuesday of its first ever issuance of yuan-denominated government bonds for offshore investors. The debt issuance is certainly limited: It’s only in Hong Kong, and that too debt only worth $879 million—a fraction of its $140 billion of fiscal deficit, all in line with its usual caution on capital account liberalization. But China’s ambitions are far from limited.
China’s finance ministry says it wants to “improve the international status” of its currency. This isn’t the first indication on this front. Since March, when central bank governor Zhou Xiaochuan first floated the idea, Chinese policymakers have been waging war on the US dollar’s reserve currency status. They have been left jittery about the value of their dollar assets —about one-third of China’s $2 trillion of reserves are parked in US treasurys.
Many in China—and many in the US, too—are wont to believe that the yuan can replace the dollar. Since December, China has struck deals to settle part of its foreign trade in yuan, not dollars.
But reserve currency status is no small thing. It took decades after the US’ ascendance for its currency to become reserve. And after Bretton Woods collapsed in 1971, the dollar is still reserve by choice—not law—as much for its liquidity as for the US economy’s stability. What do we find in Chinese markets?
First, at a time when the Beijing is encouraging its state companies to go as far as renege on derivatives contracts, the idea that regulators are willing to give up strict control over domestic markets seems laughable. Second, the more the yuan becomes convertible, the more pressure on it to appreciate—precisely what China has tried so hard to prevent to keep its export machine chugging.
Add to that the credit bubble that China is brewing, not to mention the powder keg that is China’s political situation, and China’s currency ambitions look too far away.
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