Can You Say 'Renminbi'?
Last summer Asian central bank executives met in China to discuss the developing financial crisis. During the conference, staffers developed a currency swap model among central banks, which made the renminbi the de facto preferred currency for trade among these countries.
All of this started last July at a two-day meeting of East Asia and Pacific Rim central bank executives in Xi’an, China. The chairman, China central bank governor Zhou Xiaochuan, held talks with representatives from several countries on the subprime crisis.
Meanwhile, central bank officials worked on a cooperative model for currency swaps. The plan quickly received approval from South Korea’s central bank. Since December 2008 China has signed USD95 billion worth of currency swap deals with six countries, Malaysia, South Korea, Indonesia, Hong Kong, Belarus, and Argentina.
The idea is simple. A central bank injects the other country’s currency into its own financial system, allowing domestic businesses to borrow that currency and use it to pay for imports of that country. This mechanism deals at the same time with shortfall of USD in the global markets and currency exchange risk. With China being the constant partner of each bilateral agreement, the whole scheme is based on the confidence in the renminbi among all parties. Note that although the renminbi has been used for some time now for trade payments in East Asia, this is the first time a similar deal has been done with a Latin American country--the agreement with Argentina is for USD10.2 billion.
According to trade experts, the amount of funds involved can cover as much as 85 percent of imports from China, potentially boosting China’s exports to these countries.
It’s almost certain that the long-term strategic goal for the Chinese is the so-called internationalization of their currency which should eventually lead to the renminbi taking its place as a legitimate currency used in trade settlements around the world.
But the shorter-term reason for this action is clearly China’s contribution to the global effort to boost growth and trade. These efforts are necessary right now while the global economy is being hit hard and issues of global credit and the failure of the developed world’s banking system have yet to be resolved.
The latter remains the main problem for the global financial system; the prolonged avoidance of bank nationalization (in order to clean them up) will create more problems down the line. As any seasoned banker will tell you, the bank business is all about transparency and trust. Right now we have neither. That said, everyone now agrees that the current US recession will turn out to be the longest, deepest and broadest in more than 60 years.
And although the jury’s still out, there are indications--mainly an uptick in global manufacturing--the worst may be behind us. By this I don’t mean that the economy will make a swift turn for the better, just that it won’t deteriorate at a brutal pace going forward.
Turning to the narrower subject of markets, the global rally continues, with the emerging market outperforming by far. This is in line with my expectations, and supports my forecast that the major emerging economies will come out of this crisis in much better shape than many observers thought possible.
China remains for now the major source of good news, most of it focused on the potential of its stimulus package. For the month of March new loan issuance reached a record USD290 billion. Banks continue to lend, and people seem to be willing to borrow. Chinese consumer balance sheets are generally in good shape.
China has been my top market recommendation since late in 2008, and it remains so today. If the country’s stimulus package works (especially on the infrastructure front) expect the Chinese economy to have a V-shaped recovery this year. The sustainability of such a recovery will depend on the status of the global economy, though. If the global economy and the credit/banking crisis don’t improve by this time next year, the Chinese economy will have more serious problems to deal with.
For now, though, China seems to be headed for GDP growth of around 8 percent this year, which is nothing to fret about in the current economic environment. Capital goods orders from China have increased substantially--Japanese chemical and electronics companies are reporting capacity utilization rates back up to 70 percent.
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