The Society for Worldwide Interbank
Financial Telecommunication says yuan usage worldwide grew 15.6% between
July and August this year.
MALAYSIA’S love affair with the yuan or renminbi is growing, and it is easy to see why.
For
one thing, China’s economic clout is rising. It is now the second
largest economy in the world, and with ongoing financial reforms by the
Chinese government, the yuan is expected to eventually rise to match the
country’s economic stature.
For another - and more importantly -
China has, in recent years, been growing to be an increasingly
significant trading partner to many economies in the world, especially
in Asia, including Malaysia.
Bilateral trade between Malaysia and China, for instance, is now seven times higher than it was 20 years ago.
And China has emerged as Malaysia’s largest global trading partner since 2009.
Last
year, Malaysia’s total trade with China was valued at RM167bil, up 14%
from the preceding year, and accounting for 14% of the country’s total
trade.
The Government expects the value of Malaysia’s total trade with China to double in the next five years.
China’s rising prominence, in
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz’s words, presents “a new operating environment” that requires “dynamic response”.
At
a recent seminar entitled “Renminbi Trade Settlement and Investment”,
Zeti said one of the changes that would shape the international
financial system in the years to come was the wider role of the yuan in
trade and finance.
As it is, such trend is already taking shape, with yuan usage across the world increasing progressively.
Wider yuan usage
According
to Society for Worldwide Interbank Financial Telecommunication (SWIFT),
yuan usage worldwide grew 15.6% between July and August this year,
compared with an average decrease of 0.9% across all other currencies.
SWIFT further noted the yuan has moved up one position to be the 14th
mostly used world currency, with a market share of 0.53%, up from 0.45%
in July 2012.
Standard Chartered plc’s report supports claims that the global use of yuan is on the rise, for trade settlement, in particular.
The
international bank notes that Asian and European firms, led by those
from Singapore and London, are increasingly open to using yuan.
“We
see many European and Asian clients shifting away from settlement in US
dollars,” Standard Chartered’s Hong Kong-based foreign exchange analyst
Eddie Cheung wrote in his report.
Reports by foreign media
suggest that yuan trade settlement could run between US$350bil and
US$450bil this year, up from US$300bil last year.
It is
understood that China is also quietly working on developing new yuan
financial centres around the world to expand the international use of
the currency.
At present, Singapore and London are the only
cities outside Hong Kong that have been allowed to serve as yuan trading
centre. China is reportedly planning for the next regional hubs for
settling trade deals in yuan to be set up in Latin America and the
Middle East.
As part of an initiative to encourage a wider use of
its currency and to manage volatility in uncertain economic times,
China has been actively seeking to establish
ilateral swap agreements with foreign central banks since the onslaught
of the global financial crisis in 2008.
To date, China has
managed to set up 20 bilateral local currency swap agreements, worth a
total of 1.6 trillion yuan (RM780bil), with central banks of countries
within and outside of Asia.
This list includes Malaysia, South Korea, Iceland, Argentina, Pakistan, the United Arab Emirates, Turkey and Australia.
China’s bilateral swap agreement with Malaysia is worth 180 billion yuan.
Zeti
notes that Malaysia’s trade settlement in yuan is still at a paltry 1%
of the country’s bilateral trade with China. “There is, therefore, a
significant potential for this to increase,” she says.
Bank
Negara is currently on a mission to promote a wider use of yuan for
trade settlement and investment among Malaysian corporations as a way to
generate cost savings and minimise exchange rate risks.
“A wider
use of yuan is only a natural progression, led by China’s rapidly
expanding trade volume and its increasing role as the driver of global
economic growth,” explains
RAM Holdings Bhd group chief economist
Dr Yeah Kim Leng.
“For
Malaysian businesses with yuan obligations, the shift to the use of
yuan will provide a natural hedge and help them reduce risk and lower
cost,” he adds.
According to Zeti, Malaysia’s interest in yuan is
also notable in the investment option, with yuan deposits in the
country’s banking system having tripled within the first seven months of
this year.
Focus on Dim Sum bonds
Meanwhile, there
is also an ambition to promote Malaysia as the next hub for
yuan-denominated debt (or popularly known as “Dim Sum bonds”) in Asean
after Singapore. This is led by the growing interest in raising
financing in yuan to meet funding requirements.
“Malaysia is
well-positioned to realise this growth potential in yuan-denominated
bond and sukuk, given our market size and supporting infrastructure,”
Zeti argues.
She, however, says the number and timing of
yuan-denominated bond and sukuk issuances will depend on the approvals
of Bank Negara and the Securities Commission.
To date, there are
only two issuances of offshore yuan-denominated sukuk out of Malaysia
and a yuan-denominated bond issuance by Malaysian corporations.
“Ultimately,
the potential of Malaysia of becoming a regional yuan debt hub will
have to be led by natural market forces, that is, supply and demand,”
Yeah points out.
At present, Europe, led by Luxembourg, outstrips
Asia (excluding Hong Kong) in terms of both the number of issues and
the number of issuance locations.
Analysts, however, believe Asia (excluding Hong Kong) will soon catch up.
Anchor currency
According to the
Asian Development Bank (ADB), the yuan will eventually become the “anchor currency” for Asia.
This destiny is cemented by the growing use of the currency in the region’s trade and financial markets.
This,
however, does not necessarily mean that the yuan will become part of
the foreign exchange reserves of Asian countries, most of which still
hold US dollar, euro and the Japanese yen, says ADB. Rather, it means
that countries that use yuan widely will manage their currencies
according to the yuan’s movement.
The consensus view is that
there is still some way to go before the yuan can become a reserve
currency. That will involve further openness of China’s own financial
markets.
At present, the yuan has yet to qualify as a reserve
currency due to its lacks of full convertibility as defined by the
International Monetary Fund.
Nevertheless, many central banks
have already started to diversify their reserves into the yuan. One of
these is Bank Negara, which became the first central bank in the world
to announce the inclusion of yuan in its foreign reserves in 2010.
It has been five years since China embarked on a plan to internationalise its currency.
Analysts argue that the process of internationalising the yuan is already progressing smoothly, but gradually in a managed way.
In
their working paper entitled “Will the renminbi rule?” authors Eswar
Prasad and Lei Ye argue that although China still has extensive capital
controls in place, they are being “selectively and cautiously
dismantled”.
“China’s capital account is becoming increasingly
open in actual terms even though by this measure it remains less open
than those of the reserve currency economies – the euro area, Japan,
Switzerland, the UK and the United States,” they argue.
According to
CIMB Research
chief economist Lee Heng Guei, China has taken small yet quite
successful steps in its quest for internationalisation of the yuan.
However, he says, full-fledged internationsation of the yuan is a still a distant goal.
“China
is clearly more influential than in the past and the
internationalisation of the yuan has sped up. But it will take many more
years, perhaps another five to ten, for the yuan to be fully global and
convertible,” Lee argues.
Undervalued or not?
Now,
China’s currency policy has for long been a contentious issue with many
western developed nations, especially the United States. There has been
growing political pressure on China, led mainly by the United States,
to increase the value of the yuan.
The United States has been
arguing that the yuan is significantly undervalued, hence giving China’s
exporters an unfair price advantage over US manufacturers.
The
undervaluation of yuan, which, to some, warrants China being tagged a
currency manipulator, has even become an important scoring point in the
current US presidential campaign between Republican candidate Mitt
Romney and incumbent
Barack Obama.
A semi-annual report on the yuan by the US Treasury is due to be released on Monday.
It
remains to be seen whether the release of the report will be delayed
until after the Nov 6 US presidential election, given the political
sensitiveness of the issue.
To be fair, since the yuan’s depeg
from the US dollar in July 2005, the Chinese currency has appreciated
more than 30% against the greenback.
And reaffirming its policy
stance of further exchange rate flexibility, the Chinese government in
April widened the trading band from +/-0.5% to +/-1% for the yuan
against the US dollar.
Peterson Institute for International
Economics estimated the yuan four years ago was undervalued by 31.5%
against the US dollar. The latest estimate by the Washington think tank
in May indicates that the yuan is now undervalued by only 7.7% against
the greenback.
CIMB’s Lee contends that the yuan’s appreciation
has to be a gradual and longer-term affair to avoid disrupting China’s
economic development.
“The gradual and consistent yuan
appreciation can be considered a stabilising factor for the (Chinese)
economy, especially its export-oriented sector,” he explains.
According to the
Royal Bank of Scotland,
the yuan’s value is unlikely to change much in the short term, but
further medium-term appreciation on account of productivity catch up
remains a possibility.
“If the global economic outlook improves
in 2013, the yuan is likely to see further medium-term strengthening,
with the pace depending on current account developments,” RBS’ Hong
Kong-based analyst Louis Kuijs notes.
By CECILIA KOK
cecilia_kok@thestar.com.my
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