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The Renminbi Has Arrived

China's Currency Conquers the Mekong


The renminbi has infiltrated Southeast Asia, is increasingly accepted internationally, and may one day directly challenge the U.S. dollar. What opportunities and challenges will this bring for Taiwan and the world?



China's Currency Conquers the Mekong

By Monique Hou, Shu-ren Koo
From CommonWealth Magazine (vol. 419 )

"In ten years the renminbi will become the world's fourth hard currency on a par with the U.S. dollar, the euro and the Japanese yen," German finance minister Peer Steinbrueck has said.

Dong Tao, chief regional economist for non-Japan Asia at Credit Suisse, believes, "The renminbi will become an international currency within five years."

And Perng Fai-nan, Taiwan's notoriously reserved and cautious central bank boss, boldly predicted, "Taiwan will have a greater demand for renminbi than for U.S. dollars."

What do these pronouncements portend?

The three men have all observed the same phenomenon: The renminbi (RMB) has the potential to become the leading currency in Asia, because it is backed by China's enormous political and economic power, its aspirations and its influence.

Yet most bankers in Europe and North America refuse to acknowledge this reality.

The head economist of one European bank, who did not want to be named, categorically denies this trend: "It is impossible for the renminbi to become an international reserve currency, because it is not an internationally circulated currency at all."

But Asian experts are already clearly aware that the renminbi cannot be discounted lightly, because it will have even greater room to gain a greater role in the future. Kazuko Shirono, an economist with the International Monetary Fund (IMF), concluded in her recent paper Yen Bloc or Yuan Bloc: An Analysis of Currency Arrangements in East Asia that the yen will not be able to prevail over the yuan. The paper notes that since the Japanese economy remains stagnant, the emerging nations of East Asia are becoming less reliant on Japan in trade, whereas Chinese trade continues to expand. Should this trend continue, China will play an even more important role in the formation of an Asian currency union in the future.

China-based Taiwanese business people, on the front lines of the rise of the renminbi, are even more keenly aware of the currency's emergence in the region.

Michael Tseng, who spent 12 years in Suzhou as head of BenQ China, notes that for the time being multinationally operating Taiwanese companies still need to collect payments from European and American customers in U.S. dollars, but recently the declining role of the greenback can be clearly felt.

"The Iraq War has thoroughly destroyed America's position as the world's policeman. And in the financial tsunami of last year, the U.S. dollar was toppled from its position as the world's only supreme currency," observes Tseng, who now heads the BenQ Group's global strategy planning center.

The recent financial maelstrom ripped gaping holes in the world's capital markets and thoroughly rewrote the rules along which the global financial and economic system operates.

Resolutely taking its own road, the Chinese government early on sounded out the possibilities of establishing the renminbi as a new powerful currency, starting in Asia.

Today the renminbi's footprint has expanded well beyond China's borders, reaching north to Russia and Mongolia, northeast to North Korea, and southwest along the Lancang River and Mekong River into Southeast Asia. Toward the southeast, the "renminbi empire" has expanded across the Pearl River to Hong Kong and Macao, and across the Taiwan Strait to the outlying islands of Penghu, Kinmen and Matsu, and even to Taiwan proper.

Billions of RMB outside China

The Burmese border town of Muse is separated by the Ruili River from the Yunnanese city of Ruili on the other side of the Burmese-Chinese border. From here a land route leads to the Burmese-Thai border, while the Lancang River flows into the Mekong River. The two routes are the main arteries for the land and river transport of Chinese goods to Southeast Asia. In Muse the renminbi circulates freely among the traders from Thailand, Malaysia and Singapore doing brisk business.

Traveling further downstream on the Mekong River, you will arrive in the northern Thai port of Chiang Saen at the heart of the Golden Triangle. Catching visitors' eyes are myriads of cargo boats flying China's red five-star national flag. Many businesses here post signs saying "Renminbi Welcome." Consequently, the stall owners wear aprons with two pockets, one for Thai baht and one for renminbi. Statistics show that anywhere from 45 percent to 95 percent of trade across the Chinese border is conducted in renminbi, which means that more than Rmb20 billion has found its way out of the country via border trade.

Even before direct travel was legalized between China's southern coast and Taiwan's outlying islands, the renminbi was already in circulation there. Now that Chinese tourists are allowed to travel to Taiwan, the renminbi has also begun circulating on Taiwan proper. Hotels and shops in sightseeing spots that are popular with Chinese tourists already accept payments in renminbi.

An estimated Rmb50 billion to 80 billion is held by Taiwanese businesses or individuals in China, or is already in circulation in Taiwan, according to statistics by the Fuzhou Branch of the People's Bank of China. Taiwan's central bank estimates that in the future up to Rmb20 billion will flow into Taiwan every year.

The renminbi's use for pricing goods and settling accounts in border trade underscores its rising strength. Even though the Chinese government does not allow the free conversion of the renminbi, underground moneychangers conveniently take care of that problem. But such clandestine circulation might soon be a thing of the past, as the renminbi strives for a more prominent role in the global currency regime.

Defining the Rules for a Quiet Ascent to Power

The Chinese government is willing to launch a new currency war to back up its political and economic clout and end the U.S. dollar's dominance in international trade and financial markets.

Three years ago Chinese author Song Hongbing scored a bestseller with his book Currency Wars, in which he claims that the U.S. Federal Reserve is waging a currency war against China to destroy its economy. In an exclusive interview with CommonWealth Magazine, Song notes that in February this year the Chinese central government compiled statistics which showed that 70 percent of economists surveyed advised against buying more U.S. government bonds. "In the past this would have been inconceivable. Chinese decision-makers, academics and the private sector have gradually forged a consensus to no longer keep U.S. dollars as China's foreign currency reserves," Song asserts.

Indeed, Zhou Xiaochuan, governor of the People's Bank of China, recently raised eyebrows by declaring on the bank's official website that a new currency exchange mechanism was needed that would challenge the dominance of the greenback.

Moreover, in boosting its own currency, China has adopted a strategy that starkly differs from that of Europe or the United States, which frequently wage global campaigns and use official international organizations to push their agendas. Instead, China has adopted a guerrilla strategy – "allying with lesser enemies to attack a major foe." In bilateral transactions with the ten members of the Association of Southeast Asian Nations (ASEAN), South Korea, Russia, Argentina and emerging nations in Africa, Beijing has stealthily been pushing for the use of the renminbi, undeterred by the fact that it is still a restricted currency.

Song cites as examples the bilateral currency swap agreements that Beijing has signed with some ASEAN countries. "China does not seek to immediately make the renminbi fully convertible and completely open its capital markets, but is going for bilateral negotiations with Russia, Mongolia, Vietnam and Southeast Asia to discuss opening bilateral currency exchanges instead," explains Song, who recently took the helm of the Global Finance Research Institute, a new think tank half funded by China's State Council.

"This is a brilliant strategy," Song contends. "First of all, it is very low-key and does not directly challenge the current international currencies, so it won't draw too much attention or controversy. But this process will continue to expand the scope of renminbi circulation. Right now China is first integrating East Asia and Southeast Asia. Then it will make the Chinese yuan the third player in a tripartite relationship with the euro and the U.S. dollar. After that, it will wait for the right time."

A Guerrilla Currency War

Over the past two years China has gradually signed bilateral pacts with eight of its neighbors, including Vietnam, Burma, Russia, Mongolia and South Korea, allowing bilateral trade to be settled with the respective local currencies instead of using the international dollar standard. By settling trade in renminbi China can underpin its political and economic clout in the region and push the renminbi as a regional currency, as the first crucial step in its quest toward establishing the renminbi as an international currency. The renminbi's gradual rise means that one day the U.S. dollar could be replaced in its role as the standard for valuing goods and settling accounts in China's trade with Asia.

Late last year the Chinese State Council decided to launch a trial for using renminbi rather than U.S. dollars in trade between ASEAN and select parts of southern China – Guangdong and the Yangtze River delta, the Hong Kong and Macao special economic zones, Guangxi, and Yunnan. Central bank governor Zhou said at the time that the trial could be launched as early as March or April this year.

Since a substantial portion of cross-strait trade is still channeled via Hong Kong, this initiative would mean that trade between Taiwan and China will also be settled in renminbi.

China's trade with Hong Kong, Macao, Taiwan and ASEAN accounts for 24.3 percent of its overall trade. If the scope of trade conducted in renminbi were expanded to all of Asia, making it a regional currency, as much as 55 percent of China's trade would be involved.

At a private level, the renminbi has already established itself as a quasi-regional currency unit for Asia. But on the official plane, virtually no government has included the renminbi in its official foreign reserves.

Yet about three years ago China registered some initial progress even in that regard.

The New Darling among Reserve Currencies

In 2006 the Philippines announced that it would include renminbi among its foreign reserves. Belarus followed suit in 2007. Furthermore, several other nations are already counting the renminbi as a factor when calculating international exchange rates. India and the European Central Bank, for instance, announced in 2005 that they would include the renminbi in their currency baskets.

How did the renminbi come so far?

Actually, the occurrence of two massive financial crises within a decade – the Asian financial crisis of 1997 and last year's global financial burnout – provided China with a superb opportunity for asserting its new heft. Now Beijing wants to have a say or even decision-making power as the international community adopts measures to rebuild the international financial order and buttresses the global economy.

China has enough money to stimulate domestic demand and also boost its external trade. Against this backdrop the renminbi's sphere of influence is also bound to greatly expand.

According to monetary policy expert Paul Masson, a former advisor to the Bank of Canada, three factors decide whether the international community is ready to use a certain currency: Firstly, the issuing country accounts for a high percentage of world trade and production value, indicating that the currency is backed up by economic prowess. Secondly, the currency has achieved a long-term, stable and low rate of inflation, giving it credibility. Thirdly, the currency is used in open, deep and broad financial markets, guaranteeing trouble-free currency circulation.

China already fulfills the first two criteria. China has already become the world's third largest economy behind the United States and Japan, surpassing the former No. 3, Germany. Its external trade amounted to 10 percent of world trade last year, which makes China the world's second largest trading nation behind the U.S. Before 2007 China maintained an inflation rate of around 2 percent.

Renminbi Jitters

But as Masson puts it, "China clearly has a long way to go" before it would be able to meet the third criterion of well developed, open financial markets. The two financial crises have heightened China's sense of caution and fear about the dangers of reforming and liberalizing its financial system.

As far as Chinese manufacturers are concerned, directly using the renminbi in invoicing exports and imports allows them to completely avoid currency risks. However, for their trade partners, conducting transactions in renminbi is not necessarily advantageous. They still need to factor in risks from fluctuating exchange rates, only now the focus of attention has shifted from the U.S. dollar to the renminbi. And since the renminbi is a restricted currency, there remain big question marks as to its convertibility and credibility.

Taiwanese investors in China, however, are used to taking risks and therefore fret little about the renminbi's perceived drawbacks.

Chien Tsang-chuan, who grew up in Yilan on Taiwan's east coast, got his start in interior design and now serves as general manager of Ruentex Development, was dispatched to China in 2001 to open a convenience store chain there. Today, the Ruentex Group's C-store chain is the largest convenience store chain in Shanghai.

"Every market has its risks," Chien argues. "Everyone is positive about India, and Central and South America, but don't these economies fluctuate wildly? Everyone feels that Europe and the United States are more stable, but do you know that Britain is saddled with debt four times bigger than its GDP? The whole country seems to be hollowed out. Which market, which currency do you think has the highest risk?"

China Needs a Tripartite Relationship

However, as far as Taiwan is concerned, a huge specter of risk will always hang over China.

Song Hongbing frankly admits, "Some people advocate a ‘G2,' meaning that China should rule the world jointly alongside the U.S. But as I see it, this is just empty talk. You don't need to take such ideas seriously." He points out that China's economic power is somewhere between one-quarter and one-third of that of the United States, whereas Europe is on par with the U.S. This means that if the three economic powers are compared to the legs of a tripod, China is the weakest one.

"If we try to play a two-superpower game under such a scenario, we will definitely offend Europe. Then Europe will lean toward the U.S. Once the two join hands, China will not be able to hold up. We won't be able to play that game. Therefore a tripod-like tripartite relationship is the better strategy for China," Song argues.

It might still take a long time before the renminbi goes international, but undeniably, it has gone regional.

In our fractured post-capitalist era, everyone needs to find ways to survive in a multipolar world. The same goes for China, and even more so for Taiwan.

Translated from the Chinese by Susanne Ganz