China: Globalizing the RMB

The PRC keeps injecting stimulus capital, while its consumers are happy to spend their money for the first time on what they have been wanting to buy for ages. As PRC tourists gain reputations as bid spenders, RMB payment systems with UnionPay, the nation’s exclusive national payment network established under the approval of the State Council and the People’s Bank of China in 2002, are now being adopted by 83 countries, encouraging the Chinese to shop overseas. With the RMB increasingly recognized abroad, China’s central government is apparently preparing to globalize its currency when it’s ready.

GDP and RMB

Meanwhile, China’s foreign currency reserves (FCR) reached $2.4 trillion at end 2009, up $453.1 billion from a year before, making them the world’s largest FCR pool, paralleling GPD growth of 8.3 % in 2009. Dr. Huang Haizhou, managing director and head of the sales and trading department of China International Capital Corporation (CICC), one of the largest investment banks in China, said at a China-focused session during the recent Asia Financial Forum in Hong Kong, “The US dollar has depreciated by 35% over the last ten years, and it has been weakening as a foreign currency reserve,” adding that globalization of the RMB would benefit many countries.

Dr. Huang also noted that US GDP has declined to 15% of total global GDP in 2009, from 60% in the 1960s. Yet the US stock market remains Number One in terms of market capitalization, with approximately $1.08 trillion. China is narrowing the gap to $3.21 billion, meanwhile, becoming the world’s second largest and overtaking Japan’s $3.2 billion.

China’s GDP growth is predicted by the Chinese Academy of Social Sciences to be about 9.1% in 2010. According to Dr. Huang, the market capital of Chinese shares accounts for between 7-8% of this.

But, Dr. Cao Yuanzheng, the chief economist of the Bank of China, also a panelist on the same session, said, “To globalize the Chinese RMB is still difficult until a control mechanism is properly formed. It is also very important to stabilize the RMB’s value.”

He noted that part of the reason that the weaker US dollar has had so little impact on the PRC is that the country has already introduced an RMB payment system. About 400 companies in five cities, including Shanghai and four cities in southern China – Shenzhen, Guangzhou, Zhuhai and Dongguan – are using a duplex currency of US dollar and RMB. “It is very important that we build RMB-based assets,” Cao emphasized.

China’s potential

While the rest of the world is still trying to recover, China continues to achieve outstanding economic performance by itself, despite the fall in external demand. The PRC appears on course to overtake Japan and become the world's second-largest economy. But observers looking at the numbers should remember not only the China upside, but also possible side effects of the massive RMB4 trillion ($586 billion) economic stimulus scheme that the central government has detonated in the country. The scheme generated more than 85% of the country's overall economic growth last year, partly because China was already in the midst of nationwide infrastructure improvements when the crisis hit, creating job opportunities.

Stephen Roach, chairman of Morgan Stanley Asia, opined that China's growth was helped by "artificial stimulus." And the stimulus spending that led the revival has spurred speculation, raising alarm over potential asset bubbles.

Asked if the current economic growth in China is resilient, Roach said “yes”, but in answer to the question whether it is sustainable, he added a clear “No.”

Roach raises concerns
 
Over the next five years. China’s stimulus package will start to ebb, commencing in the middle of next year, and lack of external demand support for exports will be visible, said Roach, adding that China’s economic growth may slip to 7% or even lower. Then the government may consider addressing another stimulus plan, but Roach said that this should not be necessary.

Instead, he recommended that the PRC should support domestic wage-earners’ income structure; support the blueprint for the development of a large-scale consumer products sector and industry; and introduce a social safety net – all as part of its twelfth Five Year Plan. Actual Chinese policy has not come out yet.

Roach warned that China is still heavily dependent on external trade demand, and the country needs to support the growth of internal demand. The service sectors in China account for only 40% of local GDP, and Roach noted that this number should be increased by 65% over the next 12 years.

“China commits to opening its capital account, making its currency convertible, but I do not think that it is in China’s best interests to move aggressively on its currency,” Roach added.

China is potentially a consumer market of 1.3 billion, and if the government keeps implementing the correct schemes to create jobs and increase household incomes, the country has huge potential for domestically-driven organic growth. When global trade eventually turns around at some point, China will play a key role in global trade patterns, but the appreciation of RMB and the depreciation of US dollar need to be balanced in order to restore trade flows in the global market. The globalization of the RMB is still too early, but it might be realized one day in the future if China can keep on its current growth path.

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