[Viewpoint] China flexes its currency muscles

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[Viewpoint] China flexes its currency muscles

China has now surpassed Japan in terms of nominal second-quarter gross domestic product, emerging as the world’s second largest economy after the U.S. The news is hardly surprising. It had been widely expected and was just matter of time.

But the global market was enthralled with different news from China last week. The People’s Bank of China announced on Monday measures to liberalize the bond market, allowing foreign central banks and commercial banks to invest their yuan holdings in sovereign debt as well as corporate bonds on the Chinese interbank bond market. The world’s second largest economy is now pitching its debt as equally attractive as U.S. Treasury bonds. The goal is to widen the international role of the Chinese currency and make it as accessible as the U.S. dollar. It a supplementary measure to a pilot program that was launched in the latter half of last year allowing imports and exports of goods and services to be settled in yuan, rather than in dollars or other foreign currencies. But there was a hitch. Overseas companies and banks had no place to invest their yuan holdings. With dollars, they could buy treasuries and derivatives related to raw material. But they had to just sit on their yuan holdings until suitable buyers came along. Appetite for the Chinese currency receded and cross-border trade settlement based on the renminbi remained limited despite the liberalization measures. The latest move’s aim is to break this bottleneck.

The Chinese are stepping up efforts to internationalize the currency. The use of the renminbi to settle trade transactions was expanded in June from an initial five cities to 20 Chinese provinces and to counterparties in all countries, not just in Hong Kong, Macao, and Southeast Asia. In July, it allowed Hong Kong-based financial institutions to sell renminbi-based funds. Foreign investors have been allowed to purchase equities and debt on the mainland through Hong Kong banks in hopes that the steps will whet a bigger appetite for Chinese assets. Now sovereign debt has been added to the menu. The Chinese have begun its capital game against Western markets.

China was forced to swallow losses over the weakness of the U.S. dollar in the wake of the global financial crisis. It mounted political efforts to strengthen the renminbi as a super-sovereign currency akin to the almighty American dollar and euro. But the job has not been that simple. China knows that it can’t build a global profile on its currency overnight. It turned to the Asian market to do the groundwork. So begun its strategy to go long on Japanese and short on U.S. assets. In the first half, the Chinese bought $20.3 billion worth of Japanese sovereign debt and sold $50.1 billion in U.S. Treasuries.

It has also been stocking up on Korean government bonds in its central bank foreign-exchange coffers. Its holdings in Korean bonds totaled $3.4 billion as of June, more than double the amount from six months ago. China can play a vital role in determining our monetary policy one day. The policy to internationalize the renminbi is no longer a matter of concern for Americans and Europeans since Chinese capital is also gobbling up Korean equities and real estate. China’s ambitious to turn the renminbi into a global reserve currency and internationalize its capital and financial market will pose both a challenge and opportunity to Korea. Pundits say China would inevitably have to seek help from Korea to globalize the renminbi. We must prepare to how respond and gain from this ambition.

*Translation by the JoongAng Daily staff.
The writer is the deputy director of the China Institute of the JoongAng Ilbo.

By Han Woo-duk
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