International Law

The Ambitious RMB

By Stan

Can’t say I agree with this Caijing commentary on the future of the RMB:

The yuan is expected to gain popularity as a regional currency as China expands trade with Taiwan, Hong Kong and Macau[.]

China?s trade already surpasses Japan?s in the region. After becoming a settlement currency, the next logical step would be for the yuan to become a regional reserve currency.

Let me count the ways.

1. The article’s main theme is that the RMB needs to become a regional currency before “going global.” Why would anyone assume that the next feasible option to the dollar as an international reserve currency is to have the RMB replace it? Even PRC government officials, who recently complained about the dollar regime, suggested that a good stand-in might be something like the IMF’s SDR.

2. Sure the RMB will gain in popularity as regional trade grows. Citing Hong Kong, Macau and Taiwan as examples, though, does not really shore up the argument. Hong Kong and Macau are part of the PRC, and if the government wanted to, it could do anything it wanted in those countries, including cessation of their local currencies. Taiwan is obviously more complicated, but even there, the PRC is going to have more and more influence (IMHO) as time goes on.

3. The article also suggests that exchange rate reform is necessary so that the RMB can grow into its role as a regional reserve currency. I’m all for exchange rate reform, but the authors want this liberalization to take place mostly in the area of trade settlement:

China is running a pilot program involving Shanghai and four southern Chinese cities which will settle trade in yuan with Hong Kong and Macau. A separate pilot project involving southwestern provinces and regions will use the yuan to settle trades with Southeast Asia.

That’s fine, but if China is really going to wait two decades for full convertibility (as the authors assume), their overall plan for the currency seems rather farfetched.

I think a greater role regionally is inevitable, but replacing the dollar is not going to happen. Real RMB reform that would lead to a floating exchange rate before 20 years is up sounds like the best plan to me. Twenty years is more than enough time to stabilize the financial system here.

© Stan for China Hearsay, 2009. | Permalink | No comment | Add to del.icio.us

Full post as published by China Hearsay on April 29, 2009 (boomark / email).