There are a number of questions that should be answered before the final determination of one’s view on the internationalization of the yuan. And here are there.
Does the internationalization of the yuan have to firstly:
- result in unfettered cash transactions and thus full convertibility of RMB;
- lead to all transactions in international trade could be made in RMB;
- lead to the situation when People’s Bank of China will become the world’s largest financial institution and all financial products and financial instruments will be dominated in RMB?
Are the above points essential and sufficient for the internationalization of the yuan?
Is it possible to imagine a situation that one or all of these claims will be partially fulfilled, though the internationalization of the yuan will become a reality?
Is it possible to imagine a situation when RMB is internationalized while China’s public authorities have full control over its currency? If so, what conditions must be fulfilled and if not why not?
In this text I would like to answer these question outright and also indirectly, and in the same time in general terms share my views with the readers on the more and more important issue of internationalization of the yuan. I have very clear views on this matter and I do not pretend that I do not have them. And I have completely opposing views to 99% economists. I have my beliefs and I will effectively – as far as possible – fight against harmful – in my opinion – so called free-market views on this matter.
Let’s start with the nomenclature. And so to me the internationalization of the yuan is a process in which the RMB takes over the functions in the world that so far have been associated with U.S. Dollars. So one day CNY will be so strong currency that desired by everyone. It will be the currency that everybody wants to have even for hoarding, but there is still a long way to go. It will be commonly used because yuan will be exchangeable into any other currency – I think that this process will end as the first. In short, CNY can be used by everyone and everywhere; such is the U.S. dollar so far. The only question is: whether, at what time and to what extent is it real?
Now, let us remember under what circumstances U.S. dollar became the currency of the world. The World War II was for USA a kind of watershed. What is rarely remembered United States was before very isolationistic country. As a result of WW II U.S. became world power, not only economical, but also political. USA could and consequently began to enforce their point of view and way of thinking to other countries as the world long and wide. Because why not. The white man is created in the way that if he can do something by force or in the simplest way, he just does it. Bretton Woods was a classic example. USA moved away from the gold basis, and since then the Federal Reserve (the U.S. central bank) – a private bank created by Morgans and Rockefelers in 1913 – he did not just print dollars in quantities to satisfy the interests of the internal state (dollars became very cheap, therefore it was very profitable to export goods to the whole world), but what more important – to make the necessary financial world conquest. Dollars had been printed so intensively, that the current purchasing value of one U.S. dollar is only 2% of its value before the 80 years. They could aggrandize the power in the world, because there was no real counterweight in so called democratic world for such a puissance, which the USA was. If the economic threats did not work, then they tried with military threats.
So we actually had unipolarity on a financial market.
Now, the world is beginning to change. We are moving (slowly, very slowly but still) towards multipolarity. This has been best seen in the international politics, when the current powers, so democratic countries are effectively blocked in their actions – even at the UN – by Russia and China.
But coming back to my Chinese / yuan things; situation of U.S. Dollar also gets complicated.
Firstly, for some time now – I do not know since when, because I do not especially care – dollar was significantly passed in the „common usage” by the Euro. I would not be surprised that turn away from dollar has started in 2008, when it emerged who really rules in the United States and how they are weak in the challenge of the international financiers.
Secondly, in the following parts of the globe U.S. dollar begins to be displaced by the yuan as a result of the financial strategy pursued by:
- making swap agreements by government in Beijing with already 18 countries, which I described here;
- another way to shift away from the dollar parity is making by China credit agreements with new countries or organizations which associate countries of the given region and in these regions credits would be employed. China, in this case put at the disposal of these organizations – such as the Organization of African Unity – large amounts of money (here 20 billion dollars) – not counting those amounts that are at stake as a result of negotiations between the governments. And here let me remind everyone that in 2012, Prime Minister Wen in Warsaw at the meeting with representatives of the governments of South-Eastern Europe, declared the amount of 10 billion dollars for the development of China’s cooperation with the countries of our part of Europe. The Polish authorities have done nothing to make this fund operational. Why? The answer is above. Since this loan is part of China’s global strategy of strengthening RMB position. And yet, our beloved leader is Frau Merkel’s yes-man and he will never do something what could harm the Euro (mind you, it is the German currency), and consequently the dollar (because this couple is bound together like Siamese twins).
- Another way to get rid of the U.S. dollar in international trade is to negotiate and implement agreements establishing settlements in renminbi and for example the yen as is the case in trade with Japan and Russia in renminbi and rubles (of unknown size)
- Moreover, there is a huge cross-border market around PRC. Only those who know the settlement of trade between China and the ASEAN (Association of Southeast Asian Nations) group of countries, know that the value of this market until 2015 is around 400 billion dollars. Enemies of China could say that yuan is spreading in the body of the world such as cancer cells. By entering into this poetry, I hope that this cancer / juan will simply kill them.
Here comes an insertion.
The agreement on clearings excluding dollar was signed by China and Japan in December 2011. And we are talking big numbers here, because Japan is the third biggest contractor for China (after US and UE). A half of the year barely passed and the strongest political clash (since the WW2) took place between those two countries. Sales are going down and Japanese in China have been degraded to the status of invaders and bandits. An interesting thing though; the first country that had decided to leave the dollar, namely Japan, got into an argument with China, which it has an agreement with. Coincidence? Not really. American national safety agencies don’t draw millions of dollars from the budget to simply not be able to deal with this alarming and essential problem of uncle Sam.
End of the insertion.
I would like now to skip to another intriguing aspect of yuan’s internationalization. Namely, I’ve been recently reading a lot of analyses and statements of various analytics from all over the world about the matter mentioned above. And I have noticed an interesting trend. Every single one of those overeducated authors has a disturbing feature: they generally seem alarmed by the Beijing Chinese, whose hitherto policy related to the RMB internationalization is considered by them as unclear. And every time while reading a text like that I wonder what would happen if I could have a culprit like that just available to perform a so-called bamboo torture on him. He would lay on the grass, this candidate for China government’s advisor, and have bamboo sticks thrusting in his wise body (this torture was widely applied by the Japanese emperor’s army during the Second World War). And all that wouldn’t be just because I am such a bad person, but to get an honest and straight answer from this person for the question which is bothering me:
What good would his advice do for China?
It’s just when I read that some British bank representative (an infamous hero of the financial crises during the past 4 years) writes that “it would be better if the conducting of interest rates by the Central Bank of China was more clear”. Please show me a place in the world, where establishing the interest rates by the central bank or national agendas assigned for it, takes place in the flashlight and with the accompany of rattling TV cameras. It is ALWAYS a discreet process and it is NEVER known what decisions are going to be made. Look at Poland for instance. But the Chinese are advised so; just because white people have this protectionism underneath their skin towards them… and not only them.
Or the pieces of advice like this one, to release yuan. I’ve already mentioned it here, since I think that there can’t be any worse advice for China than the alike. While the foreigners, representatives of different international banks, have their interest in telling nonsense like that, the Chinese for telling them should be put on trials and convicted for infidelity. Because, briefly speaking: if the government decided the full exchangeability, the international finance would destroy the yuan in a couple of hours with a focused attack.
And now I will provide some direct answers for the questions I’ve asked myself earlier in this article.
If the internationalization of yuan has to primarily:
-lead to unrestricted cash transactions and therefore full exchangeability of RMB?,
It doesn’t and it shouldn’t. As soon as the world’s financial stock gets normal, that’s when we can talk about exchangeability of yuan. And it won’t happen soon. Otherwise China is in danger of a huge financial crush.
-cause every transaction in international trade to be made in RMB?
NO, it is and should be always a-few-year-lasting process. It won’t surely happen in trade with the EU, Canada, Australia or all the countries what more or less depend on the US. There’s no point in mentioning the US itself of course. But I can easily imagine, that in a couple of years African and South American countries will be leading the trade with China in RMB.
-lead to a situation, that the central bank of China would be the world biggest financial institution and any kinds of financial products and tools would be denominated in RMB?
Of course it doesn’t have to be this way and frankly it shouldn’t be. Mandarins from Beijing should strictly avoid the mistakes made by Americans during the last several dozens of years. The stronger will mustn’t be imposed on those less powerful, however tempting that could be. So far the Chinese almost perfectly play their chess game; let’s hope they will stick to their old habits.
Are the arguments mentioned above a necessary condition, which at the same time are sufficient to internationalize the yuan currency?
NO, under no circumstances are they necessary and sufficient for yuan’s internationalization process to develop.
Is it possible to imagine, that some of this theses or even all of them are partly fulfilled and the internationalization of yuan still becomes a fact?
It is obvious to me, that the process itself will progress with no regard to suggestions, protests or any attempts to stop it. It’s Mandarins of Beijing and only them, who should decide in this matter. And it will be them as well, who will chose the paths and methods, which – calmly and quietly – the internationalization of yuan will follow.
Is it also possible to imagine another situation, where the RMB is internationalized and at the same time the national organs of China keep the full control over their currency? If yes, what conditions have to be fulfilled, and if not – why?
Again, an obvious thing for me, that the internationalization has to take place under strict and complete control of the government. Any financial market mustn’t be given even the slightest control over it.
What conditions must or should be fulfilled when it comes to China’s trade with foreign countries, so that the exchange could be made in yuan currency? Which conditions definitely must be fulfilled and which only should?
This is the question I will answer to in the second part of the article.