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From: FEER E-NEWS
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Sent: Thursday, May 22, 2003 6:04 AM
Subject: HARD CASH -- The Growing Reach of China's Renminbi


Issue cover-dated May 29, 2003. Vol. 166, No. 21

Message To Readers
From Christopher J. Graves
Managing Director
The renminbi may not be fully convertible, but as the currency of the
world's most populous market it has been the focus of keen interest for many
years.
Articles in our archive show how the Review has kept readers up to date with
the latest news and thinking. This extract is from an article published in
June 1988:
The People's Bank of China, the central bank, is to allow selected foreign
banks to do limited business in China's non-convertible currency, the
renminbi, on a trial basis. The banks' renminbi lending and deposit-taking
will be restricted to Sino-foreign joint ventures and foreign-owned
businesses operating in China.
Happy time travelling.



THE NEW ASIAN DOLLAR:
THE GROWING REACH OF CHINA'S RENMINBI
Driven by the country's economic success and with quiet support from
Beijing, China's currency is more and more welcome across the region for
business and tourism. And it could be on its way to a much bigger role in
Asia
More reports:
* The renminbi is becoming the preferred currency
* Hong Kong watches nervously


CURRENCY
The Renminbi Zone
Driven by the country's economic success and with quiet support from
Beijing, China's currency is more and more welcome across the region for
business and tourism. And it could be on its way to a much bigger role in
Asia



By Michael Vatikiotis/HONG KONG and Bertil Lintner/CHIANG MAI
Issue cover-dated May 29, 2003



SOMETHING SURPRISING is happening to China's currency. Although not fully
convertible, the renminbi, the "people's money," is growing in use as a hard
currency outside China--the first sign of its potential role as "Asia's
money." In Hong Kong and along China's borders with Southeast Asia, an
emerging renminbi zone can be traced, fuelled by burgeoning Chinese trade
and tourism.
WHAT GIVES THE RENMINBI REACH
.The growth of China as a market and export base
.Beijing's drive to deepen its trade ties with Asia
.Growing renminbi use in areas bordering China
.Full convertibility is an eventual goal for Beijing
.Rising domestic demand
In Hong Kong, which has its own currency pegged to the United States dollar,
the renminbi is used to buy goods at electronics stores in the busy shopping
areas of Kowloon. At some automated teller machines in Hong Kong, customers
already have the option of withdrawing renminbi or Hong Kong dollars.
Mainland banks in Hong Kong issue renminbi-denominated credit cards. Fewer
Chinese who travel exchange renminbi for foreign currency before leaving
China--as they're supposed to. Instead, they do so at their destinations.
The renminbi is, for instance, listed among exchange rates of hard
currencies at Chiang Mai airport in northern Thailand. More than 16 million
mainland Chinese went abroad in 2002. The renminbi is also increasingly used
in commercial transactions across wide stretches of Southeast Asia close to
the Chinese border.
"China is effectively managing a hard currency," says Michael Kurtz, chief
analyst for Bear Stearns in Hong Kong. "The move is almost effortless,
backed by solid reserves and wise economic policies." What's more, adds
Steve Xu, a Chinese economist in Hong Kong, "this is all driven by market
forces, not a deliberate policy."
The rise of the renminbi is a quiet result of the rapid growth of China's
economy, and a conscious effort by the government in the past few years to
deepen trade ties with the rest of Asia. The International Monetary Fund
estimates that 40% of total trade within non-Japan Asia is intra-regional,
and trade with China accounted for 40% of the increase in 2002. As well as
reflecting China's growing economic influence in the region, experts say
that Beijing is counting on the currency acting as a strategic tool to
consolidate China's power and influence in Asia, possibly paving the way for
the renminbi's debut as a regional reserve currency. Chinese Prime Minister
Wen Jiabao said recently that a strong and stable renminbi is good for Asia.
Annual growth rates in China of about 8%, boosting regional trade and
tourist flows, seem to be achieving such an aim. Some experienced financiers
worry that sceptics may be ignoring a dawning reality. A particularly strong
advocate of the currency is John Wadsworth, an advisory director of Morgan
Stanley based in San Francisco. "The renminbi will be free to trade, it will
be a strong currency, Chinese banks will be dominant, and it is highly
likely that there will be four major currencies in the world within 10-15
years," he says. Adds Edward Zeng, CEO of Sparkice, a leading Beijing-based
electronic-commerce company: "It amounts to a gradual move toward
convertibility."
The authorities in Beijing tentatively support this development. Guo
Shuqing, a deputy governor of China's central bank and the chairman of the
State Administration of Foreign Exchange, told local media in March that the
government's attitude "is both supportive and cautious" about the increasing
internationalization of the renminbi.
Guo estimated the total amount of renminbi in circulation outside China at
greater than 30 billion renminbi ($3.6 billion). "Not only in neighbouring
countries, but even in the United States, there are places for the exchange
of renminbi. The circulation of renminbi demonstrates confidence in the
Chinese economy," Guo said.
China's membership of the World Trade Organization only accelerates the
emergence of a strong, unified Chinese currency. This, in turn, will
increase the desirability of a fully convertible renminbi, both as a way of
smoothing the integration of China's economy into the world economy, and as
a way for China to exercise its economic might more directly. Full
convertibility is a stated goal, but no fixed timetable has been set.
The renminbi's gradual emergence is consistent with past Chinese experiments
in economic and political reform. "Since China trade is becoming an
important part of intra-regional trade, China will be happy to see the
renminbi used," says Andrew Freris, chief economist at BNP Paribas in Hong
Kong. "China turns a blind eye to all this and sees an upside in terms of
acceptance of the currency," concurs a senior economic adviser at HSBC in
Hong Kong.
This willingness to experiment could explain why a blind eye is being turned
to the flouting of foreign-exchange restrictions normally applied to Chinese
citizens travelling abroad (officially there's a limit of 6,000 renminbi
each). The renminbi is already in wide circulation in the countries favoured
by Chinese tourists in Southeast Asia, principally Singapore, Malaysia and
Thailand.
For its part, Hong Kong is open to increased use of the renminbi to buy
goods and services. Joseph Yam, chief executive of the Hong Kong Monetary
Authority, says the city as an international financial centre in China
should "capture any international financial intermediation activities
denominated in renminbi." A spokesman for Hong Kong's Financial Services and
the Treasury Bureau says: "The growing use of renminbi in Hong Kong is a
natural development along with the financial integration between Hong Kong
and the mainland." Economist Xu, a research fellow at the Hong Kong
think-tank Civic Exchange, estimates that renminbi worth HK$30 billion-40
billion ($3.8 billion-5.1 billion) is in circulation in the territory.
Then there's the growing use of the currency in areas bordering on China
that increasingly rely on cross-border trade. For now, the heart of this
creeping renminbi zone is focused on some of the region's most marginal
economies. The renminbi is the principle trading currency in northern Laos
and northern Burma as far west as Mandalay and south to Kentung, just 150
kilometres from Thailand. It is also widely used for business in Cambodia
and Vietnam. According to some reports, the renminbi is being hoarded as a
hedge against inflation in Cambodia, alongside the dollar.
In Burma and Laos, the Chinese currency is a hard substitute for weak local
currencies like the Burmese kyat and Laotian kip. The blackmarket rate for
the kyat is as low as 1,000 to the dollar, from 250-300 in 1997. The
official rate of the kip has slipped from 960 to 10,500 in the same period.
More conveniently, the renminbi can be used for purchases and any kind of
deal across the Chinese border.
Cross-border trade has increased in recent years. Consumer goods, machinery
and fruit come in from China; timber, minerals and smuggled cars leave
Burma, Laos and Thailand. All these transactions, amounting to hundreds of
millions of dollars in annual value, are settled in renminbi--greatly helped
by lax controls over carrying currency in and out of China. An official from
the Yunnan provincial government told a recent Asia Society conference in
Hanoi that more than a million people crossed the border with Vietnam in the
previous 15 months.
Along the Thai banks of the Mekong River, Chinese traders from Yunnan do
business without converting their renminbi into Thai baht. All over
Thailand, an underground banking network enables traders to transfer funds
in and out of the Chinese currency. A similar system works in the Pearl
River Delta region connecting Hong Kong with Guangdong province. Says Marc
Faber, one of Asia's most experienced financial analysts: "The renminbi is
the strongest currency in Asia right now; the problem is there isn't enough
of it in circulation."
It's a curious situation because the renminbi is still subject to rigid
capital controls. Regional central banks will not hold the renminbi as a
reserve currency, nor do they issue debt in renminbi because China keeps it
to a de facto peg of nearly 8.28 to the dollar. The renminbi is not freely
convertible on the capital account, and most analysts don't expect this to
change for some years. The fear is that opening the country's capital
account too soon will lead to huge outflows because of a lack of confidence
in the banking system.
Of course, China has already used its currency to play a leading regional
role. Pledges to maintain a stable renminbi were a key source of confidence
for Southeast Asia during the 1997 financial crisis. China signed
currency-swap agreements as part of an Asia-wide currency safety net under
the Chiang Mai Initiative, designed to ward off future financial crises.
China's $300 billion in foreign reserves are the second-largest in the world
and will likely play a central role in a planned Asian bond market quietly
backed by Beijing. China and the Association of Southeast Asian Nations have
agreed to form a free-trade area within a decade.
In the longer term, these developments foreshadow what some experts see as
the evolution of the renminbi into a regional currency floating against the
dollar, euro and Japanese yen. A Chinese currency that becomes a regional
currency would validate and facilitate China's emergence as a global
economic power and reduce dependence on the dollar. It would also make
possible renminbi financing throughout the region. Chinese official data
show illicit capital inflows in 2002 instead of the usual drain, indicating
new confidence in the Chinese currency.
Japan's latent banking and debt crisis makes the yen less suitable as a
vehicle for wider Asian monetary integration, some experts believe. In turn,
the mighty dollar could become relatively less important in an area
dominated by trade links with China. So argue George von Furstenberg and
Jianjun Wei of Indiana University, in a recent academic paper proposing that
a fourth major international currency, after the dollar, euro and yen, will
have to crystallize in continental East Asia. "If and when China's currency
. . . develops into a major international denomination rivalling the yen, it
could become one of the two pillars of a multilateral monetary union with
most other East Asian (and some Southeast Asian) countries," they write.
Long-term trends lend support to this view. There is the growing size and
importance of China's financial system, assuming sustained economic growth,
and the fact that the relative importance of the U.S. market to China and
Hong Kong is shrinking. "China is today a medium-sized economy with GDP
equivalent to that of Italy," writes Jonathan Woetzel, a Shanghai-based
director of consultants McKinsey & Co. in his new book Capitalist China.
"What makes it distinctive is its growth. By 2010, it is expected to almost
double in size to rival Germany. With continued growth it will surpass Japan
by 2020."
There are signs that East Asia's combined real GDP could even exceed that of
the United States if productivity growth and technology catch-up continue at
a rapid pace. "Based on this outlook," argue the paper's authors, "we do not
share the view that maintaining a U.S. dollar peg, particularly with the
yen-dollar rate on the loose, would continue to bring the blessings of
stability to a continental East Asian monetary area far into the future."
That's not to say the renminbi will emerge as the dominant Asian currency in
the near future. After all, Japan tried and failed to build a yen-trading
bloc in Asia at the height of its boom. But the needs of hungry Japanese
corporations overseas meant that Japan's banks went on a lending spree that
contributed to the weakening of the yen. And some analysts see an interim
period during which China will rely more heavily on the dollar as it pulls
in foreign direct investment, bolsters its reserves and stretches its
trading wings farther afield.
For now, and perhaps the next few years, there are clear limits to the scope
of the renminbi. The overwhelming majority of foreign-exchange transactions
in the world involve the trading of shares, bonds and other financial
instruments. Actual transactions involving goods and services amount to
probably less than 10%. China's currency won't figure in financial-service
transactions until full convertibility.
Even if 30 billion renminbi is circulating outside China, that's barely 2%
of the total value of the currency in circulation. The dollar will likely
continue to dominate the region because the U.S. is a net borrower. "The
reason the yen and the euro are not as strong as the U.S. dollar is because
both Japan and the European Union are net lenders, not net borrowers," says
Freris of BNP Paribas. China is also a net lender with a total estimated
foreign debt of $170 billion against its reserves of $300 billion--much of
this denominated in U.S. treasuries.
While its spread across Asia presages a wider role, the renminbi's strength
against the dollar and yen are far from assured. China may have another
economic downturn, or a banking crisis that would puncture confidence. The
renminbi also needs to secure legitimacy in the free, open market, rather
than in shadowy corners of Southeast Asia's marginal economy. As Zeng of
Sparkice points out: "It is only when China has surpassed Japan economically
and Japan is bogged down in stagnation that the renminbi can acquire the
position as a common currency in Asia."
Susan V. Lawrence in Beijing contributed to this article



http://www.feer.com/articles/2003/0305_29/p026china.html

CURRENCY
THE TIDE CHANGES AT LAST FOR THE RENMINBI IN CHINA



By David Murphy
Issue cover-dated May 29, 2003



The renminbi is gaining ground at home, as well as abroad, especially
against the U.S. dollar. It's fast turning into the preferred currency for
locals and foreign companies investing in China. "With confidence growing in
the boom, it is becoming the currency of choice within China," says Stoyan
Tenev, lead economist at the International Finance Corp. in Washington.
That's a big reversal. In the years after the Asian financial crisis,
foreign companies, unable to borrow renminbi inside China, borrowed dollars
offshore and converted them into renminbi to pay for their local
investments. As the companies earned hard currency for their exports, their
loan repayments were secure against what many feared would be an inevitable
devaluation of the Chinese currency.
Chinese firms, meanwhile, paid off dollar borrowings for the same reason and
many individuals converted savings into dollars to take advantage of higher
interest rates at local banks. A devaluation never came, but the result was
a $75 billion foreign-currency surplus from 1999-2001, outstripping the $67
billion added to official foreign-exchange reserves, according to the Bank
of International Settlements in the BIS Quarterly Review last September.
Billions of dollars were hoarded inside China and billions more were sent
abroad, despite the efforts of the State Administration of Foreign Exchange
(Safe) to staunch the haemorrhage. Between 1996 and the end of 2001 about
$80 billion was registered under the "errors and omissions" column in
China's balance of payments, according to Safe. The column exists in the
financial statements of many countries, including the United States, and is
where bookkeepers put the loose ends. "It's a summary of all your misses,"
explains Robert McCauley, deputy chief representative of the BIS
Representative Office for Asia and the Pacific based in Hong Kong. "The
balance of payments ought to add up to zero, and when it doesn't, the net of
all the unrecorded transactions is called 'errors and omissions'."
This capital flight despite strict currency controls includes money from
smuggling and frauds. Most of it, however, seems to be controlled by state
companies that shared the widely held lack of confidence in the renminbi.
But last year in a dramatic U-turn, $7.79 billion flooded back into China in
contrast to the $4.8 billion that left in 2001. Analysts interpreted the
switch as the result of the attractiveness of the renminbi because of
China's ability to pull in investment and export overseas. In addition,
Chinese banks have made it easier for foreign companies to borrow in
renminbi. Tied to U.S. interest-rate changes, renminbi rates are now cheaper
than for dollar loans. In late 2001, U.S. dollar deposit rates fell below
those for renminbi, so people changed dollars into renminbi, bolstering
growing expectations of an eventual renminbi appreciation. In addition,
foreign companies that are now focused on the domestic market prefer to
spend and earn in the local currency.
Increasing the demand for renminbi, foreign companies are more likely to buy
Chinese-made capital equipment. "China's capability to supply equipment of
the quality we require has improved and of course we need to pay local
suppliers in local currency," says a spokesman for British Petroleum, which
early last year secured a ground-breaking $1.8 billion-equivalent loan from
a consortium dominated by domestic banks. The loan consisted of more than 9
billion renminbi and $708 million with borrowings in both currencies from
Chinese banks.
Adding to the renminbi's increasing allure is a sharp rise in consumer loans
to buy homes and cars. The popularity of the renminbi looks set only to
grow.


http://www.feer.com/articles/2003/0305_29/p028china.html

CURRENCY
Hong Kong Would Pay If It Switched



By Tom Holland
Issue cover-dated May 29, 2003



The increasing internationalization of the renminbi is being watched
nervously in Hong Kong, whose own currency has been pegged to the U.S.
dollar since 1984.
For Hong Kong, that stability has come at a price. Unable to depreciate its
currency during the Asian economic crisis, the territory has suffered
persistent deflation ever since, with consumer prices falling 14% since
1998.
That hasn't swayed Hong Kong's administration, which has pledged to maintain
the peg despite periodic calls to devalue the Hong Kong dollar or to link
the local currency to the renminbi as China gradually drops its capital
controls and liberalizes its exchange-rate regime.
Joining up to the renminbi could spell economic disaster for Hong Kong. With
many economists believing the renminbi is undervalued by 40%-50%, the
Chinese currency would soar if floated.
And if the Hong Kong dollar was hitched to the renminbi instead of the U.S.
dollar, it would appreciate too, pricing an already expensive Hong Kong out
of the international market and devastating the local economy.
"The peg is the key to Hong Kong's economy and very important to Hong Kong's
stability," Chief Executive Tung Chee-hwa told the Legislative Council this
month. "It is of crucial importance to keep the peg."