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Author： Source：The Economist Update Time：2013-02-08 |
Tesco, a supermarket chain, has changed the way people shop in Britain and a dozen other countries. It is also planning a change in its own shopping habits. Like many multinationals, it buys a lot of stuff from China, and, like most foreign firms, it pays its Chinese suppliers in hard currency. But now it wants to pay them in China’s own coin, the yuan.
Tesco is part of a trend. In the last three months of 2012 the amount of trade settled in China’s currency reached almost 900 billion yuan ($145 billion), or 14% of China’s trade, up from almost nothing three years earlier. China accounts for about 15% of the world’s money supply. But until mid-2009 almost all of that money was sealed within its borders. Since then, China’s hermit currency has become notably more cosmopolitan. The government has allowed Chinese importers and exporters to settle their trades in yuan, and Chinese firms to make foreign direct investments with the currency.
One result has been a growing volume of yuan deposits offshore. The currency has migrated not only to Hong Kong, where many shops accept the currency and some ATMs dispense it, but also to Singapore and London (with over 14 billion yuan of deposits). This week banks in Taiwan started offering yuan accounts, after China set up a clearing bank in Taipei.
The yuan has a long way to go before it becomes a rival to the dollar, with other countries pegging their exchange rates to it, issuing bonds in it and holding their currency reserves in it. Its role in financial transactions is piffling. Adding all international payments together, the yuan ranks only 14th, behind Russia’s rouble and Thailand’s baht, according to SWIFT, a firm that ferries payment instructions between banks. China has signed currency swaps with some 20 countries, including the United Arab Emirates; Nigeria’s central bank, among others, holds some yuan in its reserves. But the dollar still accounts for over 60% of global currency reserves, with the euro, yen and pound making up most of the rest.
Between hermit and hegemon
Even if it remains a distant competitor to the greenback, the yuan’s rise poses questions for both the Chinese authorities and Western multinationals. For the Chinese, the issue is financial liberalisation. The regime likes its capital controls, because they provide shelter from financial storms and allow the authorities to manipulate the exchange rate and interest rate, without losing control of inflation. But the same barriers deprive Chinese firms and households of the benefits of financial competition. Chinese savers earn meagre interest rates at home and are deprived of the chance to invest abroad. And the yuan will not become a really successful international currency unless outsiders can use it to buy Chinese assets at will.
So a more liberal regime makes sense. But the government needs to get the timing right. It must reform its banks first before opening up to the outside world: otherwise depositors might flee overseas the moment the gate is lowered.
For business, the message is simpler. The yuan is already changing international commerce—especially as a trade currency. Indeed, some of China’s capital controls may spur the yuan’s use in trade. When Chinese exporters are paid in dollars, the country’s foreign-exchange regulator steps in, verifying the transaction before releasing the funds. But the yuan escapes such scrutiny, making it increasingly popular with Chinese suppliers. The same is true for Chinese importers. Using China’s currency brings other advantages too. It makes Chinese invoices cheaper and clearer: clearer because the supplier’s costs and mark-ups are not obscured by their exchange-rate calculations, and cheaper because suppliers no longer add a bit extra in case the yuan goes up. This currency risk is instead passed on to the foreign buyer, who is typically better placed to hedge against it.
Firms in the West, especially America, may be reluctant to adopt an unfamiliar currency. But this numisphobia could prove costly. The West accounts for a falling share of China’s trade. And firms in emerging economies, accustomed to other people’s currencies, may be quicker to adopt the yuan than Western rivals wedded to the dollar, euro or pound. The more widely the yuan is used, the more useful it will become. Little by little, China’s currency is gaining ground. And as Tesco likes to say, every little helps.