[Viewpoint] The day yuan cascades into Korea

A few days ago, I got in a taxi in Shenzhen, China a city located immediately north of Hong Kong. I offered to pay in Hong Kong dollars at a higher rate than the exchange rate because I did not have Chinese currency with me.

The taxi driver refused, because 100 Hong Kong dollars ($12.86)would convert to just 86 yuan and he did not like the hassle of exchanging the currency. A 100 Hong Kong dollar note translated to 132 yuan in the early 2000s. A taxi driver, despite the hassle, would have happily driven off with Hong Kong cash.

With the yuan’s value skyrocketing, Hong Kong households own at least two bank accounts in mainland currency, eying appreciation in the renminbi.

Bank deposits in yuan surge more than 10 percent every month. Yuan capital is funneled into the housing market, fanning an upward spiral in Hong Kong real estate prices. Hong Kong real estate prices in the first half this year have shot up to pre-1997 financial-crisis levels.

Regardless of the global debate over the value of the yuan and simmering currency war between the United States and China, the Chinese currency is quickly gaining global status.

China has been increasing offshore financial bases and allowing banks to settle trade accounts in the renminbi, adding Southeast Asian countries as well as South Korea on the list for yuan access.

Beijing authorities paved ways for offshore financiers to invest in mutual funds as well as bonds in the Chinese currency. Foreign central banks and financial institutions are now free to buy Chinese government bonds, encouraging them to funnel their yuan reserves from trade settlements back into the Chinese capital market.

The liberalization would encourage foreign appetite for the Chinese currency and boost liquidity in the Chinese capital market.

Southeast Asian economies responded heartily to the Chinese deregulation move. The central bank of Malaysia was first to purchase bonds denominated in Chinese currency and other regional central banks followed suit.

Hong Kong is excited and overjoyed with the momentum in globalization of the mainland currency. It aims to grab the opportunity to serve as the hub of international yuan trading that it sees as the new engine for growth.

Hong Kong financiers love to use the term “yuanization” of the Hong Kong dollar. They are calling for the territory to abandon the Hong Kong dollar and opt for the renminbi as the official currency.

But Hong Kong authorities cannot easily decide because shifting the official currency to renminbi would mean giving up currency sovereignty to the Chinese central bank. It must choose between opportunity and risk.

Bilateral trade between South Korea and China reached $140 billion last year and South Korea’s trade reliance on the Chinese market topped 20 percent.

South Korea may have to make a similar choice one day. Watching China blatantly wield its newfound clout to push and shove Japan on territorial claims in the East China Sea, we should be relieved that we deal with Japan in our territorial dispute over Dokdo, not China.

But the dispute over Diayu by China and Senkaku by Japan is political. The currency issue is economic. Money follows returns. Race and state are secondary.

If trade deals increase in yuan settlements, so will our economic reliance on China.

We would one day, like Hong Kong, find ourselves purchasing housing in Gangnam in Chinese bills. I dread the day will come when yuan capital cascades into the Korean equity and real estate market.

*The writer is the Hong Kong correspondent of the JoongAng Ilbo.
Translation by the JoongAng Daily staff.

by Cheong Yong-whan