International Financial Management Final Project
1. The problem of transformation of Yuan into the international currency causes many disputes. One consider that Beijing should make the decision on full converting of Yuan as that will turn into full-fledged international currency. Others believe that Yuan has already become the international currency, giving impressive figures of the growing scales of use of the Chinese monetary unit in the international trade. The third adhere to the point of view according to which transformation of Yuan into the international currency is not favorable to Beijing and the power of the People's Republic of China even specially interferes with it. Complexity of a problem that the movement of Yuan in the direction of its internationalization assumes three various stages: transformation of the Chinese monetary unit in trade currency, investment currency or reserve currency.
The last world financial crisis once again confirmed huge value of the American dollars in system of the international finance and revealed a problem of their shortage. This shortage was provoked considerably by the European banks which before crisis financed the huge sums of dollar assets under a loan of means of other banks, and also the monetary market of the USA and the central banks of various countries. The American authorities responded to deficiency of dollars with the conclusion of very big dollar swaps with the central banks of other countries, and with the largest of them - in general in unlimited volumes.
Against such situation the Chinese government undertook a number of the initiatives testifying to transition to more active strategy of internationalization of Yuan. Such internationalization of Yuan means active use of this national monetary unit in international payments with other countries, including an export and import at the cross-border movement of the capital, and also when releasing on global securities markets, denominated in this currency.
Yuan as a Trade Currency
Process of transformation of Yuan into the international trade currency began after the financial crisis of 2007-2009 which bared unsteadiness of key world currencies – dollar and euro. In spite of the fact that China expands borders of its trade markets, the main trade partner of the country continues to be the USA. However, both countries use the US dollar as the only currency in their economic relations. However the US dollar dominates in trade not only in the People's Republic of China, but also in other countries. In 2008-2009 the first steps on internationalization of Yuan were designated (Wong, Chan, 2013). Then it was authorized to number of the enterprises and companies to use Yuan in trade with Hong Kong, Macau, and the ASEAN countries. In the middle of 2009 only three hundred sixty five companies received the right to use Yuan in the foreign trade transactions and at the end of 2010 their number has increased in more than two hundred times (Murphy, Yuan, 2009). Two years ago all Chinese companies that had licenses not only for export, but also for import operations could use Yuan. Active transition to the foreign trade calculations in Yuan happens along with expansion of use of national monetary units of trade partners of China (Murphy, Yuan, 2009). It is promoted by the conclusion of bilateral currency swaps of the National Bank of China (NBC) with the central banks of the countries which are trade partners of the People's Republic of China. Nowadays the National Bank of China signed more than twenty agreements on currency swaps. If in 2010 only 3% of foreign trade of China were carried out in Yuan, at the end of 2013 this figure reached nearly a quarter of foreign trade. Furthermore, according to forecasts of HSBC, in 2018 this share has to grow up to 30% (Murphy, Yuan, 2009).
At the end of the previous year and the beginning of this year Yuan bypassed euro and managed to take the second place after the US dollar. It is significant that Yuan began to be used even in trade of China with the United States though its share in bilateral Chinese-American trade does not exceed two percent yet. Yuan positions in the total international turnovers of currencies in the world much more modest. Except service of trade in goods and services the Chinese currency are used for an exchange for other currencies (currency market) and for any business and investment deals (share and other financial markets). Ten years ago Yuan possessed only the 35th line among currencies on total amounts of the international turns. At the beginning of 2012 it rose by the 13th place. At the beginning of 2014 the Chinese currency has already came to the 7th place, having outstripped, for example, Swiss franc.
Convertibility of Yuan
Yuan positions in the total international currency turnovers substantially depend on its convertibility. Now it has partial convertibility that means possibility of free use of Yuan for implementation of the current operations, and first of all, commercial transactions. In 1996 China carried out partial converting, and then the Chinese authorities declared that ten years were required to pass to completely convertible Yuan and to cancel restrictions on capital operations. However since then passed eighteen years, and such restrictions still remain. Of course, transformation of Yuan into freely convertible currency would sharply increase scales of use of Yuan in a world currency turn, but it would be only the short-term effect, besides for economy of China risks sharply increase.
Rather recently Yuan was currency with the fixed rate and underestimated that did it by the instrument of active foreign trade expansion of China. From 2000th years Beijing refused administration of an exchange rate, formally the course became free, but adjustable. The National Bank of China which, systematically avaricious dollars, euro and other currencies, artificially contains growth of an exchange rate of Yuan is engaged in regulation, keeping it at the lower level than parity of purchasing power of Yuan and dollar (Zhang, Chan, 2011). If to enter full convertibility of Yuan, there is risk that the National Bank of China will lose control over an exchange rate of the monetary unit. And there is a direct threat of present model of economy of the People's Republic of China founded on trade expansion (Wong, Chan, 2013). The economy of China, which has already underestimated Yuan exchange rate, faces certain problems because the world market is sated with the Chinese goods and further export expansion is complicated. The issue of the currency mode of Yuan will be resolved depending on what future perspectives of model of economy of the People's Republic of China, but in the country leaders there is no full consent on the matter. And without accurate long-term strategy of economic development transition too hard to Yuan and it will turn back a concession to pressure of the West and serious risks.
For the first time informal statements appeared in 2011, when the Chinese heads said that it is desirable to make Yuan freely convertible currency. In November, 2013 was passed the third plenum of the Central Committee of a PDA, where two oppositional camps were designated: a) camp of supporters of development of domestic market and transformation of China into the country with the developed and independent economy; b) camp of supporters of fast integration of China into the world markets of the capital. In official communiques it was said that the country would move in the direction of full convertibility of Yuan. It means that the second camp received overweight, and supporters of the first camp managed to achieve only that transition is too hard to Yuan (Murphy, Yuan, 2009).
The Movement to Investment Yuan: The Way of Small Steps
That Yuan which were used in foreign trade collect on accounts of the foreign companies delivering goods to China. Not all export revenue of trade partners of China is used by them for the subsequent purchases of goods in China for the same Yuan. According to the National Bank of China, at the end of 2013 the mass of Yuan abroad exceeded 1, 5 trillion that about 250 billion dollars.
Actually this money supply forms the offshore market of Yuan. There are appeared two types of Yuan: a) Yuan onshore (that are stored and address in China); b) Yuan offshore (what are stored and circulate outside China) (Zhang, Chan, 2011). Their prices do not coincide and they have separate course quotations.
Further dynamic development of trade in Yuan is possible only in such kind of condition when Yuan, that is accumulated abroad, will find fast application. Of course, for Yuan it is possible to buy goods in China, but foreign holders of Yuan would like to expand the range of the various opportunities: a) if necessary to change Yuan for other currencies; b) to buy in China not only goods, but also assets (that is to carry out investments into the Chinese economy). One of steps in the direction of transformation of Yuan into freely convertible currency is an agreement with other countries on carrying out converting of Yuan in other currencies. Today direct converting of Yuan in US dollar, Japanese yen, Australian dollar, Russian ruble, Malaysian ringgit, and New Zealand dollar is possible. The last agreement of this sort was concluded between China and New Zealand in March, 2014.
A large number of Yuan, which were received by China’s trade partners, accumulates on accounts of banks in Hong Kong which received the name of the market of offshore Yuan. Deposits in Yuan made at the beginning of the current year about 12% of all deposits in a banking system of Hong Kong (in 2008 this figure made only 1%). Authorities allowed simplifying the order of interaction between this offshore market and domestic market of China that makes the Hong Kong Yuan more convertible. Hong Kong acts as a peculiar lock between domestic market of China and the world market.
The second offshore market, where Yuan bargains, is London. In total for the beginning of this year four offshore markets where the Yuan bargained with use of wide range of other currencies worked: Hong Kong, London, Singapore, and Taiwan. This year experts expect an emergence of one more platform – in Frankfurt. In the same place National Bank of China and Bundesbank agreed to create the center of payments and clearing calculations in Yuan (Zhang, Chan, 2011). Since December, 2010 Yuan bargains also for rubles at the Moscow exchange. Exchange trade in couple ruble-Yuan was at the same time started at the Shanghai exchange. The trade volume of Yuan and ruble grew by 3,5 times in comparison with 2012, having made more than 100 billion dollars.
Trade in Yuan on different trading levels promotes increase of demand for the Chinese currency. In addition, there is an issue of full convertibility of Yuan is brought up again. For this purpose it is necessary to carry out, on the one hand, liberalization of access for foreign investors to domestic market of the People's Republic of China; on the other hand, to lift limits for export of the capital from China. Small steps in these two directions are taken every year, and now – nearly every month.
According to recommendations of the IMF (that has appeared to be requirements) in order that the country could declare full convertibility of the currency, it has to have the developed domestic financial markets. That is convertibility in a broad sense assumes not only possibility of purchase and sale of currencies at a market (free) rate, but also free purchase and sale of bonds and actions (convertibility of securities). Generally, in China there is a market of the capital, and on an indicator of cumulative capitalization it is the third in the world. However, experts state that the domestic financial market is still not really flexible, and it is under a strong administrative press of the state. In 2014 Beijing declared liberalization of interest rates for the credits that, according to the western experts, is a significant step on the way to creation of full-fledged domestic market of the capital.
Since September, 2013 the Shanghai free trade zone (on which foreign investors are allowed) started functioning. It is a peculiar experimental platform where full converting of Yuan is allowed. At the beginning of 2014 issue of bonds by National Bank of China for the sum of 2,5 billion Yuan was carried out, and papers placed in London. Approximately in the same time the British management company managed to receive from the Chinese commission on regulation of securities market of the license for direct investment into China. Such license was obtained for the first time outside Hong Kong or the mainland of China. In January, 2014 the Chinese exchange investment fund started bargaining at the London stock exchange. There are especially close relations between Beijing and London and they are visible with the naked eye. The Anglo-Chinese relations received one more impulse on March 31, 2014 when the Bank of England and National Bank of China signed the agreement on creation in London of settlement clearing center on work with Yuan.
To sum up, the financial crisis of 2008 - 2009 which was followed by sharp increase of instability of the leading world currencies – US dollar and euro both on the relation to each other, and in relation to currencies of other countries, considerably accelerated understanding of need of reforming of the international monetary system, extension of the list of the reserve currencies used in international payments. The most active role in realization of this idea is played by China. It should be noted that China, having concentrated on the solution of internal economic problems and having achieved huge successes in the sphere of economy, started reform of the monetary regulation slightly later when it was demanded by need of own economy and its increased involvement into universal economic processes.
2. Nowadays the subject of internationalization of the Chinese national currency of Yuan is very important in connection with constantly growing influence of People's Republic of China on development of world economy in general and on development of economies of the certain countries – trade partners of China in particular. China has continued the systematic realization of new currency policy which has taken place in conditions of a world economic crisis and growth of the majority of economic indicators of People's Republic of China.
According to the Public statistical administration of the People's Republic of China, GDP of China following the results of 2011 grew by 9,2% in comparison with previous year and made 47,2 trillion Yuan (7,5 trillion dollars). According to the Public customs office of the People's Republic of China, the turn of foreign trade of China in 2011 grew by 22,5% and made 3,64 trillion dollars. Thus the positive balance of trade was reduced by 14,5% – to 155,14 billion dollars. According to the data provided by the China Daily newspaper of January 10, 2012, rates of a gain of foreign trade were slowed down. In 2011 export grew by 20,3% – to 1,9 trillion dollars, and import grew up by 24,9% to 1,74 trillion dollars. As a result, the positive balance of China’s trade in 2011 was reduced in comparison with 2010 by 14,5% and made 155,14 billion dollars. Reduction of positive balance of trade happened in the third time in a row. However, China continues to be the largest exporter in the world and takes the second place after the USA on import volume. According to forecasts of the Ministry of commerce of the People's Republic of China, in 2012 the positive balance of the foreign trade of the country will remain, however, its size will continue to be reduced, and foreign trade of China will become more balanced.
According to the results of 2011, the European Union remained the largest trade partner of China. The volume of trade of China with Europe grew in 2011 by 18,3% and made 567,21 billion dollars. Commodity turnover with the USA increased by 15,9% and made 446,65 billion dollars. Signing of the agreement on a free trade zone between China and the countries entering into ASEAN promoted rapid growth of mutual trade which in 2011 increased by 23,9% and made 362,85 billion dollars.
Thus it should be noted that the volume of trade of China with other countries from BRIX association in 2011 grew the advancing rates in comparison with 2010. For example, commodity turnover of the People's Republic of China with Brazil, Russia and South Africa increased by 34,5, 42,7 and 76,7%. And this fact is not casual. Apparently, crisis processes of the last years in economy of the largest trade orchestra seats of China – Europe and the USA force the Chinese management to think of reduction of influence of these processes by economy of China and to introduce amendments in geographical distribution of the foreign trade streams. Twenty years ago China exported 75% of its products to Europe, the USA, Japan and Hong Kong, but now this indicator decreased to 60%.
Mexico and the countries of BRICS that experienced a lesser extent affected by world crisis have showed the fast gain of economic indicators caused by great domestic demand. The ministry of commerce of the People's Republic of China selected thirty countries and regions of the world as key partners for diversification of the Chinese foreign trade, proceeding from their natural resources, the population and market size. Transferring of accents in foreign trade of China from the developed countries on emerging markets will allow the People's Republic of China to balance effectively the foreign trade turnover.
In 2012 there was an action of such factors as the reduction of foreign demand for production of the Chinese export branches caused by world crisis, growth of cost of labor in China, an increase in prices for raw materials and the proceeding growth of an exchange rate of Yuan. As a result, according to heads of the Ministry of commerce of the People's Republic of China, in 2012 conditions of foreign trade for China were rather difficult. Also the analysts of the largest world banks considering hold such opinion that the gain of foreign trade of the People's Republic of China will significantly be slowed down. In these conditions the Chinese management should pay the closest attention to successful realization of problems of diversification of the foreign trade streams, and also actions for further internationalization of Yuan.
In 2011-2012 years the National Bank of China continued practice of signing of agreements on a currency swap with the central banks of other countries. In April – May, 2011 China signed agreements on a currency swap with Reserve bank of New Zealand for 25 billion Yuan, with the Central bank of Uzbekistan for 700 million Yuan and with the Central bank of Mongolia for 5 billion Yuan (in March, 2012 this sum was doubled to 10 billion Yuan), and in June, 2011 – with National bank of Kazakhstan for the sum of 7 billion Yuan. According to the China Daily newspaper of 27.10.2011, in October, 2011 for three years the agreement on a currency swap with Bank of Korea was prolonged, thus its sum doubled to 360 billion yuans. At the end of December, 2011 very similar agreements were also signed with Bank of Thailand (for 70 billion Yuan) and the State bank of Pakistan (for 10 billion Yuan). In February, 2012 China signed an agreement for the sum of 10 billion Yuan with the Central bank of Turkey, and in March – with Reserve bank of Australia for 200 billion Yuan.
The leadership of the People's Republic of China continued realization of actions for development of the financial products expressed in Yuan, to opening of new opportunities for investment of Yuan abroad and also on investment in China of Yuan from foreign accounts, for example, on development of the market of offshore Yuan which received designation of CNH (Chinese Yuan delivered in Hong Kong), unlike usual alphabetic code of the Chinese currency – CN.
Initial restrictions on use of Yuan in international payments were the reason of emergence of this market. On March 2, 2012 the National Bank of China declared that all Chinese enterprises with the export-import license had the right to make calculations for the foreign trade transactions in Yuan. Before use of Yuan for the foreign trade calculations was authorized to all import companies, and receiving Yuan for export from China was authorized only to the companies which passed the corresponding registration in local tax authorities. (Wong, Chan, 2013) Because of this restriction after the beginning of the program of internationalization of Yuan, by the available estimates, about 80% of volume of the international payments in Yuan was the share of payments of the Chinese enterprises for the goods imported to China and only about 20% – on payment of the Chinese export. Such kind of imbalance led to the situation when considerable sums of Yuan were collected on customers' accounts at banks of Hong Kong.
Therefore in 2010 the leadership of the People's Republic of China started to create and develop the market of offshore Yuan. In January, 2011 the National Bank of China permits Chinese companies and banks to participate in the program of calculations in Yuan in cross-border trade to use Yuan for direct investments abroad for creation of joint ventures, merges and absorption, purchase of shares in the share capital of the foreign companies. Moreover, the authorized those to repatriate profit on such investments back into China in Yuan. Furthermore, it was authorized to Chinese banks to credit the Chinese companies on the purpose of similar direct investments abroad. As a result in 2011 the total amount of the Chinese investments in Yuan abroad reached 20,15 billion Yuan. The publication of rules in October, 2011 (provided by the National Bank of China) was an important step in the direction of further internationalization of Yuan. They regulated the use by the Chinese and foreign investors of Yuan which are legally acquired abroad (offshore Yuan) for direct investments in projects in continental China.
At the beginning of April, 2012 the specified quota was increased to 50 billion Yuan, and the Chinese commission on securities in the future plans to allow participants of the RQFII program to issue stocks of exchange index funds (exchange-traded funds, ETF), for instance, index funds which shares address at the exchange. Thus the total amount of deposits in foreign currency increased by 0,9%. Total amount of payments in Yuan in Hong Kong by calculations in cross-border trade in January, 2012 made 156,4 billion Yuan (in December, 2011 there were 239 billion Yuan). By estimates of analysts of J. P. Morgan, by 2015 the sum of offshore Yuan (CNH) on accounts in Hong Kong from receipts from trade operations can make from 2,6 to 3,5 trillion Yuan (395 – 530 billion dollars).
The existing growth rates of the international payments in Yuan revealed "narrow" places of current payment CNAPS system (China National Advanced Payment System) in China as a result of which the cost of international payments in Yuan was higher than the same translations in other currencies (such as US dollar, euro, etc.). Therefore now National Bank of China carries out work on reduction of the existing payment system to compliance with modern requirements, and, according to the available data, in October, 2012 the SNAPS system of the second generation which will allow to perform instantly interbank calculations in Yuan within the country has to be started and to improve carrying out currency and exchange transactions in real time. Besides, prospects of further internationalization of national currency forced National Bank of China to start development of essentially new payment system which received the name CIPS (China International Payment System).
The new system which as it is supposed, will be put into operation within one-two years, will be compatible to SWIFT system and directly will connect the Chinese and foreign participants of international payments in Yuan that will allow to take one more step towards transformation of Yuan into full-fledged world currency. Prospects of implementation of the global project of internationalization of Yuan are extremely important for the American-Chinese trade and economic cooperation, especially, if to consider that fact that China became one of the main foreign trade partner of the USA though the gain of mutual trade was not uniform in recent years. In 2009 under the influence of a world economic crisis bilateral commodity turnover was reduced by 32% in comparison with previous year and made 38,8 billion dollars. Then in 2010 it grew in comparison with 2009 by 43% and made 55,5 billion dollars.
All in all, there is an additional vital condition of internationalization of currency which consists in its full converting, for example, free and nothing limited purchase and sale of this currency by residents and nonresidents of the country issuer, in other words, the country that uses this currency. According to many economists, such strategy follows from doubts of experts and power structures, in this case China about ability of US dollar and from now on to carry out function of accumulation/saving in world currency system, for example, to be world reserve currency. However in this regard it should be noted the special nature of the balance of payments of the People's Republic of China in relationship with other countries. It is characterized by the growing dependence on the international currency. All of these are depended on result of a combination of openness of the Chinese markets in relation to foreign investments, surplus of the current trade balance and insufficient extent of internationalization of Yuan.