CHINA TAKES A BIG STEP TO MAKE THE YUAN A RIVAL TO THE DOLLAR
The Malaysia Chronicle, July 3, 2012
Shenzhen is where China’s economic miracle began. Back in 1980, Deng Xiaoping and his Beijing comrades launched a special economic zone, or SEZ, in the southern enclave that became the center of a grand experiment in introducing free capitalism into Communist China. Foreign investors were invited to set up factories in the zone, cracking open the tightly controlled economy to the outside world, and as money poured in, attracted by China’s cheap and plentiful labor, world economic history was altered forever. The Asian giant was transformed from an agrarian basket case into the “Workshop of the World” and chief rival to American economic dominance.
Now Beijing is again turning to Shenzhen for a new batch of trials with capitalism by dusting off that old idea of the SEZ and repurposing it. The consequences could prove just as sweeping for both China and the world. On Friday, Chinese policymakers formally revealed that they would turn a slice of Shenzhen into a new sort of SEZ to experiment in currency convertibility. The SEZ, called the “Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone” will be developed near the border with bustling Hong Kong at a cost of $45 billion. Details on exactly what financial reforms will take place in the zone were sparse. It is possible that the measures will include the permission of some cross-border yuan lending between Hong Kong and mainland firms. But the purpose was made clear: China is will take steps to free up the ways in which its currency, called the yuan or renminbi (RMB), can be used in international finance. “The country’s policy is to gradually open up its capital account and realize the full convertibility of the yuan,” said Zhang Xiaoqiang, vice chairman of China’s influential National Development and Reform Commission. “Qianhai, as the first experimental zone of the country’s modern service industry, should be a pioneer of that.”
In introducing this zone, China is taking an important step towards achieving one of its major goals – elevating itself from solely a global manufacturing power into a global financial power as well. Beijing has been striving to make its currency, called the yuan or renminbi (RMB), more widely used internationally, and thanks to the growing importance of China in global trade, the yuan has been gaining something of a worldwide profile. The yuan is being used more frequently in trade conducted between China and its trading partners. In a mere three years, the share of China’s international trade settled in yuan increased from nothing to 8% in 2011. Beijing has been encouraging this trend through a series of currency swap arrangements to make the yuan more readily available. China inked just such a deal, of nearly $30 billion, with Brazil in June. Some Chinese companies have been permitted to settle trade transactions in yuan through Hong Kong banks, turning the special administrative region into the primary offshore center for business in the Chinese currency. More yuan-dominated securities are available for investors, such as the “dim sum” bonds traded in Hong Kong. As China’s economic might continues to grow, the influence of its currency will inevitably increase with it. “It is apparent that more and more central banks are realizing that alongside the secular decline of the USD (U.S. dollar) as a reserve currency, the RMB is the most likely currency to challenge the near-monopoly position of the USD in the global reserve system,” Jun Ma, Deutsche Bank’s chief economist for Greater China, wrote in a June 25 report.