The Chinese Yuan is Going Global

Yuan Part of Selected Basket of Currencies

According to the International Monetary Fund – IMF, the Yuan is now part of selected basket of currencies which till now included only the US dollar, the Japanese yen, the euro and the British pound. The Yuan would not generally be a part of the basket till September 2016 and this move would not be having any immediate influence on the financial markets.

This gesture seems to be a significant one and an indication that China has been progressing faster and further on the global financial stage. It has been predicted by Nomura Securities that by 2030, the Yuan would become one of the highest three major international currencies, `a peer to the US dollar as well as the euro, as the most used currencies in the world’.

However, it all depends on whether China tends to continue its financial reforms which have been one of the major reasons of the IMF’s verdict of including the Yuan in this choice basket currency. The IMF has informed that` the decision was an important milestone in the integration of the Chinese economy in the global financial system’. It would bring a more robust international monetary as well as financial system.

China – Important to the Global Financial System

Nomura has informed that though the share of yuan’s trading volumes in the international currency market tends to be small, less than 2% comparative to China’s share of global gross domestic product, its daily trading volume had tripled between 2010 and 2014 from $34bn to $120bn. This indicates that there is a lot more yuan on the markets.

For the last few years, China had been working towards this and it is amazing that their extremely managed currency seems fit to enter this special basket of freely traded currencies. Beijing considers the inclusion of the yuan as an indication of how important China has become to the global financial system.

The world’s second largest economy had to push through numerous changes in recent times inclusive of enabling foreign investors in accessing its stock markets, to make this happen. The main determinant as to whether the yuan gets to the next step will depend on how transparent China would be about the way it tends to run its financial market.

Chinese Official under Pressure/Scrutiny

Considering the slowing economic growth in China, analysts have accepted that there have been some disturbing signs which the government is trying to either roll back on some the key financial changes or that those in charge may not know what they are doing. The point is that earlier this year, the effective devaluation of the year had taken the markets by surprise and the People’s Bank of China was disapproved for mishandling the communication around how the events had unfolded.

Chinese officials are now under more pressure as well as scrutiny in getting their message right. Moreover the world would also be watching to see what type of influence more yuan would have in circulating in the international markets. Should the yuan tend to be a fixture of the global economy, there is a possibility that the rest of the world would become even more exposed to what Beijing does, which will make it more important that the leaders of China push through meaningful financial changes.

Why China ‘Spill Over’ Poses Risks for the Euro Zone

China’s Slowdown – Risks for Euro

The economic slowdown of China could face risks for euro ranging from decreasing exports, capital outflows and exchange rate fluctuations, according to the European Central Bank – ECB. China the second biggest economy following the US plays an important role in the global trade and its economy seems to have slowed down every year since 2010.

It seems to be continuing in doing so till at least 2016 when the International Monetary Fund forecasts growth by 6.3%. From the start of 2015, the slowdown of growth in China has condensed euro area exports especially exports of machinery and transport equipment and this has brought about adverse consequence particularly for exporters of manufactured goods.

 According to the bank’s recent financial stability review, this has been accountable for around 90% of goods exports to China. The ECB which tends to control the monetary policy in the 19 countries using the euro informed that 1% point slowdown in Chinese real gross domestic products – GDP would drop around 0.1-0.15% points off euro area movement after around two to three years.

Confidence Shock – Led to Tightening of Financial Situation

The ECB have stated that an economic `confidence shock’ probably owing to a worse than expected slowdown in China could have led to a tightening of financial situation in the emerging markets with a further slowdown of euro area foreign demand.

It added that besides capital outflows from China if not compensated by the other private or official flows it could activate a depreciation of the Chinese currency taking into consideration, exchange rate depreciation of other emerging market currencies’. The bank has commented that China’s massive economy would mean that it had manipulated a significant effect on the charge of oil though this had declined in recent years as its rapid growth slowed down.

The U.S. crude oil prices had fallen by about 45% since the last year owing to an imbalance of demand as well as supply which has been partially motivated by the economic slowdown of China, an important purchaser of commodities.

Chinese Economy – Important Effect on Oil Prices

According to ECB, the Chinese economy size means that it has had an important effect on the prices of oil though its relevance had declined in recent years since the growth continued to weaken. Hence the influence of slowdown in China on the prices of oil could be limited but it significantly is based on whether the growth in other emerging market economies also slows down.

The background of global economic, including that of China could influence the decision of ECB on whether to extend or expand its 1 trillion euro – $1.1 trillion, asset purchasing program. It is said that the central bank is extensively expected to do so, when it would meet in Frankfurt on December 3.

In its report, the bank concluded that the influence on the euro area of a potential further slowdown in China eventually centres on the extent to which this slowdown spills over to the other emerging markets more generally and the point to which the subsequent loss of confidence tends to affect the global financial market together with global trade.

The Truth about China's Dwindling War Chest

China – The World’s Largest Creditor

China is considered to be the world’s largest creditor and the enormous money reserves of Beijing presently stands at a $3.6 trillion, which is still the leading owner foreign holder of US government debt. For over two decades, China, the world’s second largest economy had developed a war chest of foreign currency assets as a shield against the global winds.

However, on August 11, the decision taken to tweak its exchange rate regime to engineer the biggest single devaluation of the renminbi in 21 years has put forth the query of reserve depletion in severe aid. After deserting its peg with the US dollar for anachieveddrift, those in authority have been compelled to get involved on a huge scale to prop up the renminbi.

China had gone through reserves due to this failed devaluation, at an unmatched pace this summer wherein the reserves had dropped by $93.9 billion in August. This was the biggest monthly fall on record as well as the largest with regards to percentage terms since May 2012. This is set to continue for at least the remaining of the year. China would be slowly moving towards a much flexible exchange rate though not yet willing to feature a considerably weaker renminbi

Quantitative Tightening

As per UBS analysis, almost 70% of China’s reserve accumulation between 2005 and 2014 was from the country’s enormous present account excesses. The total reserves emaciated at $4 trillion in August 2014 had been on a steady decline since then.

As for the composition, UBS note that almost two-thirds around 62% was held in US dollar assets with about $1.27 trillion in the US treasury bonds. China had shifted from being a net buyer to a net seller of dollar assets to defend the value of the renminbi and this has given rise for concern that Beijing’s actions tends to have a stifling effect on the global credit as well as liquidity conditions.

This occurrence named as `quantitative tightening has been seen as concern when China can no longer play a part as the driver of global economic prosperity, at a time when the Federal Reserves is ultimately poised to begin normalising the monetary policy. In the midst of the trouble surrounding China’s prospects, economist tends to remain optimistic, speculating the fears of a dwindling war chest are possibly overdone.

China/Emerging Markets – Offload Foreign Currency Assets

Bumper reserves of Beijing, at $3.6 trillion, seem to be adequate in continuing to establish the currency and covering 20 months of imports of goods and services. All this, states, Tao Wang at UBS, `while the country continues running a current account surplus of over $300bn a year’.

Others consider that Beijing’s intensive reserve accumulation had been developed to confront precisely the kind of headwinds presently facing the country and are not surprising that the Politburo is now organizing them for the same purpose.

The authorities have also other various tools to fight off tighter monetary conditions. With regards to the impact on the growth of China on the rest of the world, the QT theory for intuitive appeal is still to be materialised in the form of rising bond yields with higher debt costs in the developed world.

China together with the other emerging markets could be offloading their foreign currency assets to handle their individual exchange rates though these may not be destined to drive up the bond prices according to economists.

Ground Zero'- China's Stock Market Crash Up Close in Shanghai

China Facing Plunging Stock Market

For years the Chinese Communist Party has been capable of keeping control on democracy disputes, protestors, the legal system as well as the military. However it has now been facing a more headstrong opponent in the form of a plunging stock market. Fast paced and invisible defiant market forces have confronted the efforts of the party led government in arresting the month long slide in Chinese stock market and if the same tends to continue, the fall in stock prices could slow the economy as well as weaken the faith in the party’s leadership and power, according to experts on China and economics.

 Three months back the state run People’s Daily had spoken that the increased stock prices were the `carriers of the China Dream’ and the confirmation of President Xi Jinping’s signature vision for what he calls, the great rejuvenation of the Chinese nation. However, what had been addressed as a bull market turned out to be a bubble burst. The main share index of Shanghai is down a third since its peak of June and trading in almost three quarters of listed shares were frozen due to limit declines or completely suspended and the securities regulators were also speaking on a mood of `panic’.

Stock Collapse – Reveals Impromptu Policy Makers

Since the stock market collapsed, the Chinese authorities instructed brokerages as well as insurers to buy, barred insiders from selling, tapping the nations’ sovereign wealth to pile up shares. Moreover, the government also raised patriotism blaming foreigners and arrested rumour mongers.

The Chinese stock collapse has been` a total revelation of how impromptu the policy makers could be in managing the transition to market-driven capital markets and that’s the question of the moment’ comments Daniel Rosen, a partner at the rhodium Group, which is a New York based economic advisory firm. He further adds, that `the question for tomorrow is whether that immaturity applies to their ability to regulate other aspects for the economic transition as well’.

Wary at the prospect of further losses, the Chinese government has taken action by agreeing to establish fund worth 120 billion yuan - $19.4 billion in purchasing shares in the largest companies that were listed in the index. Besides Beijing has also reduced the interest rates, relaxed restriction on the purchase of stocks with borrowed money as well as imposed a moratorium on initial public offerings.

Boom Powered by Retail Supporters

According to Financial Times, the recent dip in the Chinese stock market trailed an extraordinary bull period wherein the Shanghai composite increased by 149 percent through June 12 and the boom was powered by retail supporters who had been new to investing where more than 12 million new accounts had been opened on the stock exchange in May alone. Once controlled by the elites, the stock market progressively has now become a vehicle for China’s developing middle class.

Two thirds of the households who had opened accounts in the first quarter of 2015 had not even finished high school and the Equity market passion had spread to China’s universities, where 31% of the college students of the country had invested in stock, three quarters of which had used money that had been provided by their parents. Chinese have generally put their excess savings in housing, in recent years, however the uneven performance of real estate has prompted their interest in other direction for domestic investments.

Due to strict capital controls it has been very difficult for most of them to move money out of the country and more have turned to stock market. As per Bloomberg, more than 90 million people in China is said to have invested in equities, which is greater than the total membership in the Chinese Communist Party. The recent fall in prices has affected the fortunes of a huge number of people. Should this be a cause of worry for those outside China? Perhaps not.

China Stock Markets – Isolated

China’s stock markets are quite isolated due to a heavily combined global economy which is now the world’s second largest. Foreign investors tend to hold only 2% of all equities of China where equities account for around 5% of the overall financing. The aggregate bank deposits of China are around $2.1 trillion, providing a buffer against huge market fluctuations.

Moreover, the long bulls run which led the June’s collapse had not faded totally and the Shanghai composite is yet up by 20% since January 1. Nonetheless, these types of volatility in the world’s second largest equity market props up questions about the overall health on the economy of China. The GDP increased by 7% during the first quarter of 2015, which was its weakest mark in six years, while stimulus measures implemented by the government is yet to reverse this slide. As per Chief Economist at Deloitte, Ira Kalish, `China’s slowdown already had consequences beyond its borders’.

He has written in ChinaFile that `already the halving of China’s growth has wreaked havoc with global commodity markets and has negatively influenced growth in those East Asian economies that are a vital part of China’s manufacturing supply chain. It could be argued that the imbalances in China’s economy thus represent more of a risk to the global economy than the current and much discussed situation in Greece.

China takes control of its Currency

The Chinese government has recently reaffirmed its commitment to lead a prudent monetary policy. A message was signaled to all banks and other Chinese companies and foreign business partners. After a recent meeting, the Chinese government issued a statement which reads: "China will continue its prudent monetary policy in ensuring growth of credit to the real economy, the agricultural sector and small businesses." "Will continue", says the text, and in fact, the direction is not new. Publicly adopted in 2010, it is associated with a budget "proactive" policy, in force since 2008. On the issue of the exchange rate of the Yuan, the Chinese government encourages the continuation of the current rate "to a basically stable level." So if the Yuan is revalued, it will be a movement of low amplitude. Already at the end of last year, the new administration had announced their resolution to "expand wisely the amount of social financing to ensure a moderate emissions growth of loans." The Chinese economy is facing a double challenge: The first and foremost one is to maintain a growth rate of around 7% to ensure the increase of the population's standard of living and inflation under control, and the second one is to set right their export market which was seriously damaged by the European debt crisis which considerably reduced its export markets. To answer the western financial crisis, the Chinese launched in 2008, a multi-year recovery plan 4000 billion Yuan. They slowed and the slowdown the growth of their economy, but still fear that the financial crisis in their main customers being turned into an economic crisis, if the growth rate falls more below. The temptation is strong in these conditions, increasing the money supply. They have repeatedly reduced the benchmark interest rates and reserve requirements for commercial banks. But then tip the risk of inflation, which is not only a malfunction of the economy, but also the source of popular discontent, and thus a political danger. This is why banks are expected to deal with the "real economy", rather than seeking sources of short-term profit, spontaneous tendency of any financial institution. In this framework, they will be encouraged to provide loans. They will not be to fuel property speculation. The message is clear to European countries that China needs to export; it has no incentive to engage in any trade war. But it will remain master of its currency.

China investors shunning banks

You could fear that may happen in Europe, but in China it is happening. According to the official press, the four largest commercial banks are Chinese investors look to other alternatives - such as individuals and private companies - to deposit their money, it pushed by high inflation and low interest rates.

According to the Zhongguo Zhengjuan Bao (Journal of China securities), deposits of the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China and Agricultural Bank of China (ABC) fell by 420 billion Yuan (48.6 billion Euros) during the first 15 days of September.

The business daily also argues that much of the funds were placed on a parallel credit market. If individuals and companies are certainly not having status to bank, they nevertheless offer pay about ten times higher than bank deposits. Recall that the rise in consumer prices was 6.2% in August, while the deposit rates at one year is only 3.5%. In the end, so investors lose purchasing power by placing their money in the bank.

It should be noted also that in early September, the rating agency Fitch said it may lower the sovereign rating of China in the next two years. Reasons: the heavy debt the Chinese banking sector, the latter having provided massive loans in recent months.

Fitch could degrade China because of the banking sector

While the European Union and the United States is buffeted by a debt crisis without precedent, Thursday, rating agency Fitch said it may lower the sovereign rating of China in the next two years. Reasons: the heavy debt the Chinese banking sector, the latter having provided massive loans in recent months.

In an interview with Reuters, Andrew Colquhoun, head of Asia Pacific ratings at Fitch, has considered possible a downgrade in China from 12 to 24 months. "We anticipate a material deterioration in the quality of bank assets. If the problems of the sector are changing as we anticipate, or even worse, the next 12 to 24 months, this would lead us to lower the note," he warned.

Last April, already, Fitch lowered its rating outlook on China's "stable" to "negative", citing concerns that date on the financial stability of the country following the decision in Beijing to increase bank credit to maintain China's economic growth. Currently, Fitch assigns the note to China 'AA-', corresponding to the fourth highest level of its scale, position equivalent to that of Italy and a notch below that of Spain.

In early July, the rating agency Moody's had indicated that for its public debt to China stood at 36% of its Gross Domestic Product (GDP), taking into account the share of the debts of local governments for which Beijing assume direct responsibility. A few days earlier, the National Audit Office had indicated that the debts of the provinces, municipalities and districts Chinese rose late 2010 to 27% of Chinese GDP, representing a total of 1.163 trillion Euros.

The same office had, however, insisted that 63% of this debt would be repaid through revenue budget.

Now where the rub is; that they have borrowed huge amounts from the global financial crisis, via means of ad hoc structures called "platforms financing" or PFL.
Objective: To finance infrastructure and housing projects not always profitable.

But according to the National Audit Office; the "ability to pay is low and faces potential risks in certain areas and certain industries." Indeed, in a snowball effect, some local governments had to make new loans ... to repay the debts already contracted, also heavily dependent on land sales to meet their deadlines.

According to the auditors of governments of China, 108.3 billion yuan (11.8 billion) of loans were made or used fraudulently, the money ends up in banks or stock markets real estate.

Indeed, point out that as a guarantee, the PFL received capital that comes from land assets transferred by the community investment fund and ... fraud, bank lending in the short term what notionally provide a PFL time he gets a larger credit. All of which leads ultimately to the National Audit Office that the platforms of local funding must be "cleaned and regulated."

A bit worried, Moody's said that Chinese banks have lent billions of 8500 yuan (905 billion) out of 10'700 billion yuan (1.163 trillion euros) to local governments ... a situation that causes a high risk exposure.

"The debts existed before the global financial crisis, but they quickly accumulated in the last two years while investment by local governments has been used as a key tool" to boost the economy, adds Moody's.

China raising up ...

China is emerging as both leading markets and rising economic power, and meeting with impressive rates of double-digit growth for several years. China's financial sector also benefits from good economic policy. countries, also following the path of openness and market liberalization in accordance with agreements signed by China to the WTO in January 2001 emerging well.

Historically, between the restructuring of agriculture, industry and the banking sector, the government, in the early 1980 gives priority to primary and secondary sectors to the detriment of the banking sector which will bear the cost of the transition economy. This position has resulted in delaying the development of banks in China and weighed on the accounts of the major institutions with bad debt rates sometimes exceeding 40%. Faced with the need for modernization of the Chinese banking, the government changed tack and have signed the WTO agreement to liberalize the banking market in 2001.
Since then, many international banks, anxious to find alternatives to growing their domestic market less dynamic, investing heavily in emerging countries and primarily in the "Middle Kingdom" which presents serious advantages …

Since January 2007, the news is full of examples of foreign investment through equity, joint ventures or acquisitions in the Chinese banks. We made especially Citigroup, which won the "Guangdong Development Bank" in front of the SG, Bank Of China 10% owned by RBS or the Construction Bank of China 9.1% owned by Bank Of America. Overall, although the role of foreign banks is negligible - they represent less than 2% of Chinese assets - their position continues to grow.

Chinese and foreigners have much to gain from the recent opening of the market (2001). Indeed, the Chinese banking sector needs foreign players to upgrade the profession and make a transfer of skills; foreign players in turn reap the benefits of Chinese growth.

However, prudential Chinese are real barriers to entry for foreign banks: capitalization of at least 1bn Yuan, exposure to a single client must not exceed 10% stake in the subsidiary and the ratio of loans / deposits do not exceed 75%.

But the stakes are: market access abysmal savings of Chinese households is worth the investment for many banks and foreign insurers. Candidates rush to the office of the CBRC (China Banking Regulatory Commission) and the Chinese newspapers that tell of six banks, want to establish subsidiaries of Chinese law. Several big names such as HSBC, Citigroup, Deutsche Bank or JP Morgan have also applied. It's a safe bet that the list will grow as and regulatory developments and market opening...