How Western Publications and Institutions are “Talking-Down” the Chinese Currency
The aptly named Project Syndicate, along with Forbes, and other Western publications and institutions, have recently been publishing and releasing information on China and the assumed de-internationalization of the renminbi.
One of their arguments is that China has had to tighten domestic regulations to prevent further increase of capital outflows. POM readers will understand that this is just the caution and balanced approach which the People’s Bank of China has had to take in order to prevent manipulation from outside forces.
Opening up Chinese capital markets and allowing the RMB valuations to fluctuate outside of the trading band which is in place will require a multi-phased strategy which can be adjusted in real-time to address monetary influences and changing dynamics. Sometimes this may appear as the “one step forward – two step back” approach which is being put forward by Forbes. But this is not the case.
Another “fact” being mentioned by the Western players is the decrease in RMB usage through international currency settlements, as reported by SWIFT. This puts China down to 7th place from 5th place about 18 months ago. On the surface this would seem damning and supportive of the argument being put forward.
But what isn’t being told is that cross border trade for the RMB has been increasing with the structure of the China International Payment System, or CIPS. Coincidently, the first phase of CIPS was implemented in late 2015, which was exactly the time when Forbes and Project Syndicate state the international use of the renminbi began to reverse.
Viewing this information logically we can determine that Beijing’s objective with CIPS would obviously be to shift international payments out from under the western dollar dominated SWIFT system and expand the use of its own CIPS. As such, it can be expected that the renminbi usage under SWIFT would decrease as CIPS usage increased.
The first phase of CIPS has been so successful that phase two will be implemented shortly. We see the continued acceptance of the Chinese currency through the actions of the European Central Bank who recently re-allocated some of its foreign exchange reserves into renminbi. More of this will take place with other central banks as the internationalization of the RMB continues.
Once the RMB has reached a supportable level of internationalization and usage, the Chinese monetary policy deciders can begin to further loosen controls over the currency and domestic financial markets.
Another sign that the internationalization is moving along as planned is the recent statements coming out of the Caribbean Development Bank regarding western banking institutions. Representatives of the CDB have stated that many global banking institutions have withdrawn banking services from the region, which has left a gap.
This gap is being filled by China and the renminbi as tighter relations are developed between the two. From the CDB statement:
“In the wake of the 2008 financial crisis many Caribbean countries have struggled with bottlenecks such as having indebtedness, difficult access to finance and insufficient connectivity, and with addition of rising global protectionism and uncertainties between the Caribbean and its traditional partners, the Caribbean countries are facing more challenges in achieving sustainable growth. China is working on building new international relations based on cooperation and mutual benefit and stands ready to strengthen global cooperation with the Caribbean countries.”
The phrase “China is working on building new international relations…” should not be sold short. The use of RMB bonds as a vehicle for development loans will be one of the biggest growth areas for the Chinese currency. The rebuilding of Syria and other nations which were destroyed by the Anglo-American interests will be made possible by RMB bonds.
In addition, we can also expect China to further open its fixed income market to foreign investors. This will create unprecedented demand for China’s mainland bonds. A “bond connect” program was approved back in May which will allow investors in Hong Kong to flow capital into the mainland bonds with no limitations or caps.
As of yet, China has not allowed the reverse to happen, being mainland investment into Hong Kong. The reasons should be obvious, as stated above. The level of manipulation and trickery which takes place in the world of international finance on bond trading is obscene. China is well aware of this and will open markets and pathways when appropriate levels of security and processes have been developed and implemented.
Hong Kong Stock Exchange CEO Charles Li stated the following:
“People are now finally able to do it and able to do it in a way that is familiar, that is similar to the way we trade US dollar Treasury’s or other international treasury fixed income instruments. That is something so new. That the demand, underlying demand, the potent demand are massive”.
The multilateral monetary transition continues and all sides are adjusting and managing perceptions on a regular basis. This scripting and narrative picked up steam after the European Central Bank re-allocated some of its foreign exchange reserves into RMB. The intent would be to scare investors and other central banks away from the RMB by suggesting that it is de-internationalizing.
As within the geopolitical world, Anglo-American banking and business interests understand that this monetary transformation must take place, but are attempting to manage and build leverage for future negotiations. Understanding the process and being able to interpret the information accurately is somewhat awesome. Once you see the patterns and schemes nothing else matters. – JC
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JC Collins can be contacted at email@example.com