â€śFrankly speaking, we havenâ€™t got a lot of things for export apart from some apples, peanuts, pig bristles and soybeans.â€ť was the rather forlorn view of Mao Zedong, in conversation with Indonesian President Sukarno in the early 1950’s.
Compare that to today, with Chinaâ€™s exports weighing down supermarket shelves the world over. Admittedly, much of that comes courtesy of Western multinationals with operations on Chinese soil, but domestic companies and brands are starting to get in on the act too.
Also recently, there has been a commercial twist. Overseas firms have begun to look in two directions in trade terms, not just manufacturing in China for export but also targeting Chinaâ€™s new vast consumer class for the first time.
The catch up has been rapid. As recently as 10 years ago, both the United States and the European Union had shares of world trade more than four times greater than China. By 2010, all three were within a single percentage point of each other (and China had overtaken the EU).
All of this is crucial for the RMBâ€™s rise, as policymakers in Beijing want cross-border commerce to act as the launch pad for a threepart blueprint to push Chinaâ€™s currency out beyond its borders. As policymakers in Beijing want cross-border commerce to act as the launch pad for a three-part blueprint to push Chinaâ€™s currency out beyond its borders.
The idea is to get the yuan embedded as a trade currency first, so businesses outside China grow accustomed to using it as a means of payment for goods and services.
Next up was phase two, this time the objective is to focus on how the yuan can be invested more freely, allowing enterprises and individuals the chance to move their RMB holdings cross-border.
Here the reasoning is straightforward, and links back to trade settlement. Foreign firms are less likely to want to be paid in RMB for goods and services sold into China if they canâ€™t do much with the cash that they receive as a result. And if these firms are not invoicing in the yuan, itâ€™s less likely they will be ready to pay their bills to Chinese vendors with it too.
New regulations on how yuan can be invested internationally (i.e. moved from offshore back onshore, and vice versa) are crucial in ensuring a wider circulation of the renminbi, so that non-Chinese can grow more comfortable holding it in bank accounts or as other financial assets.
This second phase of the RMB plan is also under way with Hong Kong at the center of events as a hub for investment products.
And finally the third stage, the renmenbiâ€™s unveiling as an international reserve currency. Here there is a lot of consensus about how and when the final goalwill be achieved. Before the yuan can challenge the dollar, China needs to develop more flexible capital markets, as well as rethink a series of policies in foreign exchange and capital controls.
Some suggest that all of this can be achieved in a few, short years. But others scoff at such expectations, querying how Chinaâ€™s economic (and political) model is going to cope with the strains that further reform will unleash.
Despite that, itâ€™s clear that the renminbiâ€™s journey has already begun, and that most of us will witness it soon enough.
Courtesy of Week in China.
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