Monday, January 14, 2013

China bullying won't help renminbi become int'l currency

Bullying neighbors will frustrate China's efforts to position the renminbi as an international currency like the US dollar, according to a former adviser of the International Monetary Fund (IMF).

Barry Eichengreen, a professor of economics and political science at the University of California in Berkeley, said the world's second-largest economy must smoothen its relationship with neighbors since any diplomatic strains would take longer for other countries to accept the RMB.

"I think it is in China’s interest for renminbi internationalization to succeed. It will be a convenience for Chinese banks and firms to have their own currency [used for] cross-border transactions. To let territorial disputes get in the way obviously would not be good," Eichengreen said on the sidelines of a lecture on the Chinese currency at the Asian Development Bank last Friday.

"Hopefully the tensions in the South China Sea [West Philippine Sea] will resolve themselves," he said.

China has territorial rows with Japan, the Philippines and the rest of Southeast Asia.

It has been claiming virtually the entire West Philippine Sea, including the coastal waters of its neighbors, citing its “historical inheritance” and the nine-dash line that may be found on ancient Chinese maps.

The Organization for Economic Cooperation and Development (OECD) has forecast that China will grow at an average of 6.6 percent through 2030 and can overtake the US economy by the middle of this decade.

But Eichengreen said it is "implausible" for China to grow at that pace given that its labor force will shrink in absolute numbers within that time span whereas the US is estimated to grow its workforce by 1 percent annually.

He said large and fast-growing economies will slow down and this happens also in countries with high old-age dependencies and with undervalued exchange rates.

Scale, stability, liquidity

But the size of the Chinese economy alone is not enough for the renminbi to be accepted as a replacement to the US dollar as the currency for trade and foreign reserves, Eichengreen said.

A currency has to have scale, stability and should be liquid before it can reach the status that the US dollar had achieved after World War II, he said.

Eichengreen said the greenback was not used at all in international trade and finance prior to 1914, when the British pound sterling held sway.

But after 10 years, the US government was able to create a lender of last resort - the US Federal Reserve - that allowed its banks to branch abroad, he said, adding that by 1924, more bonds were denominated in dollars.

Before the renminbi can have scale, China's growth must be consistent as it is prone to slowdowns and inflationary shocks every now and then, Eichengreen said, adding that its internationally traded goods must be also properly valued.

For the renminbi to become liquid, China has to grow its capital markets like that of the major economies in the world, he said, citing the US bond market, which is eight times larger than China, he said.

Given the constraints and challenges China faces, it may take a quite a while for the renminbi to be accepted as an international currency that can dislodge the US dollar or be used alongside the yen and the euro, he added.-Interaksyon (January 14, 2013 11:23AM)

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