by Lady Michelle-Jennifer Santos, Chief Visionary Founder & Owner
May 26, 2013 (TSR) – The renminbi (RMB) – the official currency of China – is poised and expected to join the US dollar and the euro as one of the world’s top three global trading currencies in terms of volume by the end of 2015, and within five years, it could be fully convertible, said Douglas Flint, chairman of HSBC Holdings plc, in London Friday.
“The RMB is increasingly the part of nomal day-to-day business for anyone trading or investing in China,” said Flint at the Annual General Meeting (AGM).
“Every international business with an eye on China should be considering potential benefits for using the RMB, and the RMB investment opportunity has been created around the world, supported by the thriving offshore markets, particularly offshore bond markets,” he said.
At the same day, Bloomberg, citing with a person familiar with the matter, reported that HSBC will manage an first-ever sales of RMB denominated bonds in Singapore, a city country competes with Hong Kong as the offshore hub for the currency. According the estimates from HSBC, the offshore debt sales in RMB may reach as much as 360 billion yuan, or approximately 59 billion U.S. dollars this year.
China’s Yuan Expected as Next Global Reserve Currency
The renminbi is progressing rapidly through the three stages of the internationalisation process of use in trade, investment and in global reserves. With trade and investment, the renminbi is widely anticipated to be the next global reserve currency.
The U.S. dollar has been the world’s reserve currency since the end of World War II, when it was made such by deliberate international agreement. As reserve currency, most international exchanges are made with the U.S. dollar. This requires foreign traders to convert their money to U.S. dollars to enter the market. When cashing in their profits to spend at home, traders must usually exchange their dollars back into their native currency.
Each exchange costs a fee, which is usually passed along to the final consumer in the form of higher prices. American consumers normally enjoy a break on prices because U.S. merchants don’t have to exchange their currencies, meaning the cost of doing business is lower. Large countries tend to get better exchange rates too.
Simply, it is of this reason that Putin called America as ‘parasites’ in the global economy, making monies from all nations on Earth by “commission” from all the currency trade exchanges, and then using that money to fund their wars violating everyone’s sovereignty.
America’s once great stature has been founded on the might of its currency, but with many countries are aggressively working towards a long-desired trend to oust the U.S. dollar as the world’s reserve currency, it is clearly obvious that the field has now changed. Americans will compete harder and won’t have any special privileges anymore that has made them arrogant around the world.
Case in point, China and Australia. who are major trading partners, which last month made it official that they are cutting the U.S. dollar out of their deals. This means less money for the United States. As more and more countries do this, America’s deficit and true financial woes will become more manifested.
Chinese officials have been aiming and hoping for full convertibility on current and capital accounts to occur by 2015.
After remaining largely stable last year, the Chinese yuan has shown an upward trend since the start of 2013.
HSBC’s own research puts the daily global turnover of yuan at 60 billion ($9.1 billion), a fraction of the $US3.2 trillion traded each day globally and ranking behind the Swedish kronor, Hong Kong dollar, Canadian dollar, Swiss franc, Australian dollar (about $US250 billion-worth), British sterling, yen, euro and US dollar.
It’s not an easy feat to become a global reserve currency. China is taking a pragmatic, cautious and disciplined approach as we move along to the gradual transition of the international monetary system.
The country’s currency should demonstrate strong, stable and deep liquidity so investors can move in and out of it without sharp movements in price. It needs to be widely recognized as a reserve currency.
The fiscal discipline and political stability of the country needs to be unquestioned. Countries with large fiscal deficits are unable to be dependable safe havens. That’s because the path of least resistance is to devalue the currency to make debt loads more manageable.
Also, investors and trading partners thrive best in a market-oriented, rules-driven, open economy where the rules are clear and transparent. Faith in the fairness of the judicial system and institutions is vitally important.
America scores “well” on liquidity (perhaps too well), political stability, and is certainly one of the most market-based, rules-driven, open economies in the world. Unfortunately, it is very poor, at best a E+, on value and fiscal discipline issues.
The same with Euro, since Eurozone instability continues to block significant progress for its currency.
That leaves us with the Yuan as the credible contender, given the increasing global presence and economic dominance of China, in addition to the trust currency she has built with many other nations for its consistent peaceful development foreign policy and non-interference in domestic affairs of other nations.
There are several short-term factors behind the Chinese currency’s rapid appreciation.
One of them is the fast devaluation the Japanese yen, which has led to a massive influx of hot money into China. Of the US$131 billion increase in the country’s foreign exchange reserves in the first quarter, US$87.8 billion are probably attributable to the hot money inflow.
The other factor is China’s robust exports. With exports recording 18.9 percent year-on-year growth in the first quarter, China is expected to post a higher trade surplus this year than last. This is likely to further push up the value of the country’s currency.
Over the long term, efforts by the United States, the European Union and Japan to stimulate economic growth by increasing the money supply are expected to keep their currencies weak. In relation to this, the yuan will maintain its upward trend.
The good fundamentals of China’s economy also increase the likelihood for the yuan to continue to rise. Although the country’s economic growth has dropped to 7.7 percent, this still represents strong performance compared with the United States, the European Union and Japan.
Another factor is related to purchasing power. China’s inflation rate was only 2.6 percent last year and 2.4 percent in the first quarter of this year. If consumer prices in China remain stable for the long term, appreciation of the yuan can be expected.
Lastly, China’s trade volume totaled US$3.87 trillion last year, almost equal to the United States’ US$3.89 trillion. China undoubtedly will replace the U.S. as the world’s largest trading country this year.
With so many countries maintaining trade relations with China, international demand for the yuan will remain high, which will in turn boost the value of the currency.
Moves to full convertibility
China is now the world’s second largest economy, its largest exporter and the single greatest destination for global direct investment.
Since 1949, China’s currency has been the renminbi (RMB), which means “people’s currency”. Within China many refer to the currency as the yuan. The Chinese government is actively seeking to internationalise the renminbi to match China’s global economic status. The Chinese government policy is to promote international use of the renminbi in three stages through trade, investment and as a reserve currency.
A key development in the renminbi’s internationalisation is that the currency is expected to be included in the International Monetary Fund’s Special Drawing Rights once it becomes fully convertible.
As the renminbi is not yet fully convertible, China is gradually opening channels for capital to flow between the Mainland and international markets, and investors are being given greater accesses to both onshore and offshore renminbi, i.e. renminbi can be used outside the Chinese mainland, separate from the ‘onshore’ market used by domestic companies, Chinese residents and foreign companies with a Chinese presence.
During 2013, China’s currency, the renminbi, will be used by companies and institutions in more than 150 countries. But a select group of nations dominate international flows of RMB. Outside of China and Hong Kong, just six countries account for 75 per cent of all RMB flows.
Offshore renminbi markets are developing rapidly in Hong Kong, Singapore, Taiwan and London. Offshore borrowing and lending are market-driven and not subject to the regulations that set interest rates on the Chinese mainland. Offshore renminbi is now actively used for cross-border trade, finance and direct investment while rapid and successive waves of liberalisation are opening onshore markets to trade, financing and investment.
Rolling out the Red Carpet for the Chinese tourists and their Yuan
China offers growth for the world’s retail and travel sectors. Increasing numbers of Chinese travellers will shape areas around the world as Americans and Europeans did before them. Soon the tourist yuan may be just as recognisable and welcome as the tourist dollar.
The Chinese government is keen to promote the currency beyond its borders and has also been encouraging workers to take more holidays as part of a bigger policy to shift the economy from a reliance on investment towards greater consumption.
In February, the State Council issued its Outline for National Tourism and Leisure for the next seven years. One of the key parts was to reinforce existing regulations covering paid leave and to encourage companies to promote the benefits of holidays among staff.
Today, Chinese shoppers are now a frequent sight at the world’s retail hot spots, armed with their UnionPay cards and laden with luxury goods.
This of course is embraced by global retailers and travel companies who are now vying to capitalise on a surge of Chinese tourists, one of the most visible symbols of the country’s increasing wealth. Global retailers are starting to lure Chinese shoppers by hiring Mandarin-speaking sales staff and installing UnionPay.
The increasing acceptance of UnionPay is a marker of the internationalisation of the renminbi.
The number of overseas trips made by Chinese tourists is expected to continue to grow, from 83 million today to 130 million in 2015 and 200 million by 2020. To put this growth into perspective, annual tourist departures account for only 4.3 per cent of China’s population, compared to 20 per cent in the US. This will have big implications for global retailers as the Chinese have different motivations for travelling overseas compared to Europeans and Americans. Market research indicates that shopping surpasses sightseeing as the most favoured activity.
The Chinese overtook the Germans to become the world’s top overseas spenders last year, according to the United Nations World Tourism Organisation. In just over a decade, China has moved from near the bottom of the rankings to the very top, a remarkable achievement in a short period of time.
Last year, the Chinese spent USD102 billion, up 40 per cent on 2011. But based on China’s total population of 1.3 billion, this works out at about USD78 per head and suggests there is huge untapped spending power.
Average incomes in China are likely to increase sevenfold between now and 2050, from their current level of USD2,500. This means that discretionary spending is likely to jump as incomes rise and more Chinese citizens join the middle class.
The Chinese also account for 25 per cent of the global market for luxury labels, a larger share than any other country, an increase from 5 per cent in 2007, according to HSBC. Gucci expects China to become its number one market within five years. About 60 per cent of these purchases are made abroad, partly because of concerns over counterfeiting on the Mainland and because domestic consumption tax and value-added tax can add 60 per cent to the purchase price. To counter this, many shop in Hong Kong, Macau and Taiwan. But as the Chinese travel more, other destinations continue to open up.
Europe is likely to be the top region this year, according to the Hurun Research Institute, with France the number one destination, because of the popularity of brands such as Louis Vuitton and Chanel.
In 2011, the Chinese spent a total of 1.8 billion hours on the internet every day, nearly three times as many hours as US consumers. With all those hours, China is poised to become every online retailers’ paradise.
There are now more billionaires in Asia than in the US and many of those live in China, according to the 2013 Forbes Rich List.
Shanghai has twice as many skyscrapers as New York. Between 1990 and 2004 developers erected office space in the city equivalent to 334 Empire State Buildings.
By 2025 China will have 221 cities with more than one million inhabitants, compared with 35 cities of the same size in Europe, according to a report by McKinsey & Company. In 2010, 19.5 per cent of China’s population migrated; with nearly 85 per cent moving from rural to urban areas.
In China, 70 per cent of women work, which is among the highest female employment in the world. In North Africa the figure is less than 30 per cent and in Central America less than 40 per cent. Can you hear ka-ching again?
USA and Europe is old news as far as “superpower” is concerned. Both are bankrupt. Warmongering is also old mentality and has no place for the New Multipolar World Order. Needless to say, those nations who join its warmongering train and provoke China, need to warned that while China does not aim to become a bully like USA, we must remember that they are humans, and patience for nonsense are not in unlimited supply.
The Asian Tigers, with China in the lead, is the new powerhouse and superpower, whether the mainstream media admits it or not. It IS, not future, but IS. Anyone who cannot see that is asleep. Only countries who will benefit with mutual win-win cooperation and prosperity are those who are for world peace, harmony, and non-interference. That is the train that China is on.
China is one of the four oldest living civilisations in the world, and the last continuous one. China was the first country to make paper money about 1,000 years ago. Since then it has also used a variety of currencies including bronze coins that looked like cowrie shells; hoes and knives; bricks of tea; silver Mexican dollars; and shoes of silver called sycee. In fact, sycee was legal tender until 1935.
Chinese government and business has placed a huge emphasis on education and training. The number of college graduates could rise by 200 million over the next two decades – more than the entire labour force of the US, according to the World Bank.
Is China a threat? You betcha. But not how the mainstream media is portraying them as. Anyone who knows Ancient history, the Chinese are all for “civilising” the world into one big Confucian harmonious pot. That is the difference. The Chinese in its core, if the leadership of Xi Jinping does it correctly, are about preserving the ancient values and noble virtues. They know very well that war is fruitless and meaningless, otherwise, their ancient military strategists such as Zhuge Liang, Sun Tzu and Liu Bowen wouldn’t have written my revered and favorite books, Art of War and Mastering the Art of War.
This generation is yet to discover much of what they know now were because of this Ancient civilization. It’s about time China gets honor and credit for all their contributions to this planet’s development. China has a lot to offer besides its economic might. China and the world must learn from China’s past so we can truly transition into a more effective world governance.
All aboard to the New Paradigm train: A New Multipolar World Order with China leading the way.
Lady Michelle-Jennifer Santos is the Chief Visionary Founder, Owner and Publisher of The Santos Republic, designed and geared to educate the 21st Century generation. She is the Principal Chief Tiger of MJS Global Group, an international boutique branded organization creating branded companies worldwide and empowers clients in strategy, image/media, branding, geopolitics, international trade and development, communications, intelligence and security, aerospace, technology, entertainment, wealth management, mining, energy, infrastructure, commodities (gold, diamonds, oil and gas, sugar, cement, edible oils, rice, et al), and capital markets. Lady MJ also serves as a Senior Consulting Advisor for DeMatteo Monness LLC, a specialized agency brokerage with equity trading operations in New York and Boston and a member firm of the NASD and clears trades through Goldman Sachs Execution Clearing LLC.