The crisis of the greenback has led to an upturn in Chinese currency trading across emerging economies. Could the renminbi take over?
The Sunday Times - London
Iain Dey - Published: 29 May 2011
At No 42 East Broadway, in the heart of New York’s Chinatown, a queue is forming. Among the meat markets, noodle restaurants and the traders hawking fake designer handbags stands a branch of the Bank of China. With just $500 (￡300) and two forms of identification, any American can walk off the street and start depositing cash with the state-owned bank. They won’t receive any interest on their savings, but they will get the chance to turn their hard-earned dollars into Chinese renminbi.
It’s a straight bet against the dollar. And more and more Americans are signing up to make that bet. An increasing number of economists believe the dollar is slowly losing its grip on power. Its role as the undisputed currency of international trade is under threat. In recent weeks the Mexican central bank has bought 100 tonnes of gold, worth about ￡3 billion, as part of its efforts to trim its dollar holdings. The central banks of China, India and Russia have been doing the same. Meanwhile, Asian and Middle East sovereign wealth funds are starting to move more of their cash reserves into Australian dollars and Canadian dollars to cut their exposure to the greenback.
Goldman Sachs is among the big banks predicting a slow and steady decline of the dollar. The bank forecasts it will lose 15% of its value against the pound over the next 12 months alone. Even against the crippled euro, the dollar is expected to slide about 7% over the next year.
Big investors around the world don’t want to stuff all their savings into an asset that everyone expects to fall in value. It is those same big investors that have been funding America’s colossal budget deficit which increases by about $4 billion a day. Now that dollars are slowly going out of fashion, President Barack Obama and a whole generation of his successors could have a big problem.
“We have a world economy that was dominated by the US and a world financial system that was dominated by the US,” said Peter Sands, chief executive of Standard Chartered. “Life has got more complicated. Slowly and gradually ? but inexorably ? the way that currencies are being used is reflecting the new realities of the way the world works. He added: “The dollar is not going to disappear. It will still be the biggest currency. But there’s a big difference between being the completely dominant currency and being the most important currency. We’re on that path, and the full ramifications of that are not something any of us know.”
On an industrial estate in Dhaka, Bangladesh, Ring Shine Textiles weaves jumpers and shirts to sell to retailers all over the world. It imports most of the wool it uses from China, and last week it began paying for the shipments in renminbi. While the renminbi cannot be freely exchanged like other currencies, the world’s big banks, in this case HSBC, are starting to encourage its use as a trading currency. Ring Shine is the first firm in Bangladesh to start paying its bills in the Chinese currency, bringing another country into the renminbi’s expanding sphere of influence.
Samir Assaf, chief executive of HSBC’s investment banking arm, said: “If the renminbi becomes freely convertible and a top three reserve currency, in five years renminbi products might account for 30% to 35% of HSBC’S global banking and markets income.” The dollar is used to put an international price on everything from oil, copper, wheat and orange juice to bottles of shampoo and flat-screen televisions. Since the end of the second world war it has been the currency of global trade.
However, in large parts of the world, that doesn’t really make sense. A mining business in Chile that sells copper to an electronic chip company in Korea, which in turn sells parts to China or Japan, has no logical need to price its goods in dollars. To do so just adds an extra element of risk to the equation. During the global credit crunch of 2008, the big emerging market countries became frustrated by the dollar’s pervasive influence. The problems in the US banking system led to a squeeze on supplies of the dollar; there simply weren’t enough to go round. It was difficult to find enough to settle trades.
Emerging markets became sucked into the liquidity crisis simply because they were paying their bills in the same currency western banks were desperately trying to cling on to in order to survive. Over the past two years, Brazil and China have been orchestrating currency swaps between their central banks to allow trade to be conducted without the dollar. China has arranged similar deals with Russia, India, South Africa, Argentina and a host of other countries. Last month New Zealand and Uzbekistan became the latest members of the renminbi trading club.
In the first quarter of this year about 7% of China’s trade was settled in its own currency. That may not be much, but it has increased from just 1% a year ago. And the amount continues to rise. Across southeast Asia, companies supplying goods into China including big multinationals routinely accept renminbi as payment. Until recently, that cash was sitting in ring-fenced accounts with banks in Hong Kong. And now a new market has started to evolve. Last September the American hamburger chain McDonald’s sold a bond in Hong Kong that was denominated in renminbi.
It was the first time a western company had tapped investors for cash in the Chinese currency. Caterpillar, Unilever and Volkswagen are among those to have followed, as are Barclays and HSBC. The bonds are being bought by the companies that have built up renminbi reserves and wealthy Hong Kong citizens. Local financial rules allow Hong Kong residents to convert about ￡1,600 worth of Hong Kong dollars into renminbi every day. The value of the Hong Kong dollar is pegged to the US dollar, so the currency switch is another simple bet that the dollar will fall against the Chinese currency.
“Anybody who has the money is converting the maximum amount allowed every single day,” said Standard Chartered’s Sands. Today there are almost ￡40 billion of renminbi deposits in Hong Kong after an eight-fold increase over the past year. Now that the option exists to invest the cash in bonds issued by some of the world’s biggest companies, the renminbi has become even more appealing. “You can say as much as you like about the rise of the renminbi but you will never catch me betting against the dollar,” said one senior hedge fund manager. “The American economy is roaring back to health. And the dollar market is still huge.”
America’s size has been its greatest advantage. It has the deepest and most liquid markets in the world. For countries such as China and Saudi Arabia, which have built up huge reserves of foreign exchange, they had little option over what to do with their cash. They have bought trillions of dollars of debt issued by the American government.“It’s the reserve currency of the world and it’s the currency in which about 70% of global payments are made,” said Stuart Gulliver, chief executive of HSBC. About three-quarters of all $100 bills in issue circulate outside the US. The dollar holdings of the Chinese government amount to more than $1,000 for every man, woman and child in the country. That situation will not change overnight.
“We are moving towards a multi-currency world,” said the head of foreign exchange trading at one giant bank. “There are already two global reserve currencies. If you look at the data on central bank reserve holdings, you see that about 60% is held in dollars, about 30% in euros, and the remaining 10% in other currencies like sterling, Canadian dollars, the Aussie dollar and yen. “That situation can change without any significant buying or selling. The dollar just needs to depreciate another 20% or 30% and then you get to the point where the dollar and euro are equally important as reserve currencies. That’s quite a reasonable assumption, over the longer term.”
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