Invest in the Global Yuan

I am teaching a course on International Business here at Georgetown University. This Spring, we have concentrated on writing editorials on international business and trade issues. All my students have written and handed in one editorial dealing with an issue of their concern. I was very impressed by their work, particularly since these young tigers, as we call them here, are the ones ascending in their societal position. They will be the ones running their family’s firm, electing the next government, and deciding what their aging parents should do. So to my mind, their opinions matter.

Take a look:

This editorial was published in the Sri Lankan Guardian on 31 March 2015 Congratulations! Outside validation is always good.

by Kevin Ma

Near the end of this year, the International Monetary Fund’s (IMF) will consider adding the yuan to its in-house basket of currency reserves. The basket, called Special Drawing Rights (SDR), represents claims on reserves that the IMF holds and allocates to member nations. The approval of the yuan would mark a significant step in an ongoing process by China to increase the international presence of its currency, also called the renminbi (RMB), and would put it on par with the other SDR currencies. Currently, the SDR basket consists of U.S. dollars, Euro, pound sterling, and Yen, which the IMF reports as 47%, 34%, 12%, and 7% of the distribution, respectively.

When the IMF reviewed the SDR basket five years ago in 2010, the international organization denied China’s push to include the yuan due to the currency’s lack of convertibility. In other words, it wasn’t widely used enough to be considered freely useable. Since then, China has made substantial efforts to meet the IMF’s convertibility criteria and has resulted in significant internationalization of the currency. Already, China has established 15 offshore clearing centers—in cities including London, Hong Kong, Switzerland, and Sydney—as well as swap agreements with 28 central banks. Last November, the global payment provider SWIFT ranked the RMB 5th in the list of currencies used most in trade, up from 21st three years ago.

The rapid rise of the yuan’s popularity in the global market is hard to ignore, but should you invest in it? For the globally minded investor, the answer is a resounding yes.

Having only opened its economy to international trade four decades ago, China ranks as the world’s second largest economy, which carries with it an abundance of opportunity for investors. These opportunities have typically been restricted to outsiders, international investors have seen an increasing amount of access to Chinese capital markets and direct investment in recent years. Under the country’s Renminbi Qualified Foreign Institutional Investor (RQFII) program, China has already allowed ten countries to purchase RMB-denominated “A-shares,” which represent China-based companies traded on the mainland stock exchanges and had originally been limited to domestic investors only. Last year, China also became the largest recipient of foreign direct investment, with net inflows of $128 billion, while the United States’ inflows fell by two thirds to $86 billion, according to the United Nations international trade body (UNCTAD). As China continues to make the yuan more freely usable over the coming years in hopes of maintaining sufficient convertibility for inclusion in the SDR basket, investors will likely enjoy much wider access to the nation’s markets.

The benefits of a more convertible yuan aren’t restricted solely to investments within China’s borders. The greater prevalence of the yuan in world markets has also enabled Chinese investors to bring their capital abroad. The many Chinese companies that seek investments outside their country are more able to trade in their own currency instead of converting revenues back into the yuan through the foreign exchange markets. Chinese companies would be less susceptible to volatility in foreign exchange prices and thus have more incentive to invest internationally. For other nations, this would mean access to an abundant source of capital. The Chinese government reported that, in the past year alone, outbound direct investment grew more than 14% to $102.9 billion.

The European Union has been a major beneficiary of outbound investment from China. At the peak of the EU debt crisis, while most investors fled the continent and took their money with them, China-based companies surged into some of the hardest-hit countries and provided cash when others would not. Many of China’s European trading partners have benefited from the yuan’s internationalization, which has provided access to China’s mainland markets as well as capital from Chinese investors. As a result, the UK, Germany, and France are all competing to become the European hub for Chinese investment and yuan trading.

Some may worry that globalization of the yuan will lead businesses to be more susceptible to the influence of the Chinese government, which has typically maintained a tight control over its national economy and currency. This concern, however, is why investing in the yuan is all the more important. As international businesses take advantage of the growing accessibility to China’s markets, the nation’s government will be inclined to continue efforts to bolster global confidence in the yuan’s convertibility.

Within the near future, one can reasonably expect the yuan to play an increasingly dominant role in international trade. Should the IMF accept the yuan into the SDR basket later this year, China and its currency will become even larger players in the world market. For the global investor, now is the time to take advantage of this trend and become a part of the rapidly growing yuan market.

***

Kevin Ma is an undergraduate student majoring in Finance and International Business at Georgetown University’s McDonough School of Business.

Other Guest Student Posts:

 

What does the IMF do?

What is the International Monetary Fund?
The International Monetary Fund (IMF) is an international organization that provides financial assistance and advice to its member countries. The IMF creates and maintains the international monetary system through which international payments among countries take place. In effect, the IMF helps governments by lending them public funds.
What is its mission?
The IMF seeks to foster global monetary cooperation, secure financial stability, facilitate international trade and provide sustainable economic growth.
Who makes up the IMF?
The IMF is a specialized agency of the United Nations with 188 member countries. 24 executive directors representing all of its member countries oversee it. The IMF was created in 1945 and has its headquarters is in Washington, DC.
What does it do?
The IMF offers its assistance in three ways:·

  • The IMF reviews global economic and financial policies and then provides advice to individual countries, regions, and global economies as a whole.
  • The IMF provides financial assistance and gives loans to countries with collapsed economies or balance of payment problems such as those with severe devaluation of its currency or a major depletion of its foreign reserves.
  • The IMF gives technical assistance and training in areas such as tax policies, exchange rate policies, and banking and financial regulations to help member countries strengthen their capacity to design and implement effective economic policies.
How does it work?
The IMF gets its funding from quota subscriptions paid by the member states. The size of each quota is determined by how much each government can pay according to the size of its economy. The quota then determines the weight and voting rights each country has within the IMF – as well as how much financing it can receive.The IMF then issues an international reserve asset known as the special drawing rights (SDR) as its form of payment. The SDR is a unit of account based on a basket of currencies including the US dollar, Japanese yen, Euro, and British pound by which member states can exchange with one another in order to settle international accounts. Each member country is assigned a certain amount of SDR based on how much quota the country contributes to the IMF. Countries issued with loans must also implement the structural adjustment policies and economic reform program prescribed by the IMF and make it a priority to pay back what it has borrowed.
How much can the IMF lend?
In total, the IMF has USD 362 billion in quotas and USD 1 trillion of additional resources to borrow.
Which countries are the biggest borrowers to date?
Greece, Portugal, Ireland, Ukraine
Which countries have the biggest precautionary loans to date?
Mexico, Poland, Colombia, Morocco
How is the IMF responding to the current debt crisis In Europe and the United States?
Unlike in previous years when the IMF was the dominant and preferred lender to flailing economies in Asia and Latin America, the IMF has had a somewhat minor role in the European bailout. This, despite the Fund’s commitment to lend out $268 billion of its resources.In light of this, the IMF has been calling for reforms and new policies:

  • An increase of the IMF’s quota capital to $677 billion
  • The shrinking of its line of credit with member states which must be renewed every 6 months
  • A revisit of its voting rights where emerging markets like Brazil, China and India will have more shares. Currently, these countries have only 8% of the voting rights despite contributing 19% of the global output.

 

Related articles on the IMF:

NEWS ANALYSIS: Obama, Lagarde head to G-20 facing shaky global economy

BY WALL STREET JOURNAL, NOVEMBER 10 2014, 19:22

The (politically bruised) leader of the world’s largest economy and the head of the global financial counsellor honed their message of co-ordination at a White House meeting last week ahead of the Asia-Pacific Economic Co-operation forum in Beijing and a meeting of the Group of 20 largest economies in Brisbane.

The Obama administration and the IMF are worried Europe, Japan, China and other major emerging markets aren’t doing enough to spur growth.

Just as the US economy shows signs of gathering steam, they’re concerned that dimming overseas demand and a strong dollar will put the brakes on American growth.

The eurozone faces rising risks of a third recession in five years. China is trying to balance a slowdown with the need to overhaul its economy.

Japan’s central bank is being forced to goose growth with more easy-money policies because other government efforts aren’t enough to juice inflation and revive prospects.

Emerging markets are facing dwindling growth outlooks, failing to live up to vows to restructure their economies. And the economic and political crises in Ukraine and the Middle East, which threaten to turn into much more dangerous regional conflagrations, are fuelling investor anxieties.

That leaves the US doing the heavy lifting for the global economy.

Mr Obama and Ms Lagarde are on the same page on many of the policy problems and solutions.

“They discussed the global economic recovery and the IMF’s role with regard to US national security priorities, including financial support for Ukraine and countries in the Middle East and North Africa,” a White House official said.

The official said the two also conferred on emergency financing for Liberia, Sierra Leone and Guinea, the three countries worst-hit by the deadly Ebola outbreak. The IMF has said the beleaguered and impoverished nations will need more international aid to fight the epidemic.

The US and the IMF back more stimulus by the European Central Bank to spur eurozone growth.

Both are advocating governments around the world spend more on infrastructure as a way to inject more cash into their economies.

They’ve both criticised regional powerhouse Germany for not doing enough to spark eurozone growth. They’re fretful Tokyo isn’t going to deliver on a promised economic restructuring, setting the stage for a potential eruption of Japan’s Mt Fuji of debt.

The Obama administration and the IMF are concerned that major economic overhauls in countries such as Brazil, India and China aren’t moving ahead fast enough to ensure global consumption can fuel the world’s economy.

And they are also likely to back a push for greater financial oversight, shifting focus from the traditional banking sector to the largely unregulated financial sectors where economists worry new crises could be developing.

The IMF’s top financial official, José Viñals, warned last week that shocks, such as from another European recession, the Ukrainian crisis or unexpected US rate hikes, could trigger major market sell-offs.

“The need for action is now,” Mr Viñals said.

Monetary policy can’t be the only game in town, he said.

“It needs to be better supported by … fiscal policies, structural policies and financial policies.”

In trying to win over his peers on a decisive growth strategy, Mr Obama will face a political headwind: he has lost some clout in the realm of economic diplomacy in his administration’s failure to secure congressional approval for governance changes at the IMF.

The five-year-old deal would restructure the emergency lender by giving emerging markets greater power at the fund, more in line with their burgeoning economic heft in the world.

Feeling disenfranchised, key emerging markets are crafting strategies to bypass Washington and its leverage at the fund, including replicating the IMF’s emergency-lender role with new cash reserve pools.

“The US failure to get supporting legislation for IMF quota reform is a huge black eye,” said Fred Bergsten, senior fellow and founding director of the Peterson Institute for International Economics.

By highlighting “the IMF’s role with regard to US national security priorities,” the White House is likely signalling that Mr Obama will redouble efforts at home to get the governance changes through Congress.

It’s still an open question, however, whether the new Republican majority will help or hinder the president’s plans.

IMF Cuts Africa Growth Forecast Because of Ebola Virus

By David Malingha Doya for Bloomberg

The International Monetary Fund reduced its growth forecast in sub-Saharan Africa because of the outbreak of the Ebola virus in West Africa and violence in at least five other countries.

Africa’s economy will expand 5 percent this year, about the same as in 2013, driven by infrastructure investment, a buoyant services sector and strong agriculture production, the IMF said today in an e-mailed statement. In April, the Washington-based fund forecast a 5.5 percent growth rate this year.

While low-income countries will spur expansion with growth of as much as 7 percent in 2014-2015, Antoinette Sayeh, director of the IMF’s Africa Department, said in a statement. Ebola has killed more than 4,500 people in Guinea, Liberia and Sierra Leone since the outbreak of the virus in December.

“The Ebola outbreak could have much larger regional spillovers, especially if it is more protracted or spreads to other countries, with trade, tourism, and investment confidence severely affected,” according to the IMF. “In Ebola-affected countries, fiscal accounts are likely to deteriorate, and, where public debt is manageable, fiscal deficits should be allowed to widen temporarily.”

Worsening insecurity stemming from civil wars and Islamist militant attacks could also curb Africa’s economic growth, according to the IMF.

Read Full Article

International Trade On the Rise As Demand For U.S. Made Goods Increases

By  |  Market Overview
Advanced economies are projected to climb 1.8% in 2014 and 2.4% in 2015. These growth projections are considered crucial for global expansion as well as for the progress of emerging and developing nations. Emerging economies are predicted to grow by 4.6% in 2014 and 5.2% in 2015.

A chart displaying Gross Domestic Product (GDP) of the global economy as well as that of selected developed nations, including the U.S, Japan and the Eurozone, and emerging countries like China, India, Brazil and South Africa is provided below:

GDP Rates

GDP Rates

A spur in economic growth inducing more industrial activities is considered favorable for the expansion of the machinery industry. This direct correlation, right on the heels of the expected economic growth worldwide, makes us confident about the machinery industry. Across nations, the level of industrial activities is measured in terms of industrial production — output of the manufacturing, mining and utilities sectors.

A brief discussion on the prospects of the machinery industry in different nations has been provided below.

Prospects in the United States

International trade is on the rise. Export demand for U.S-made goods, especially automotive vehicles and parts, consumer articles, industrial supplies and materials, and food and beverages, increased by roughly $2 billion to $198 billion in July.

The world’s largest economy held nearly 16.5% of the global GDP on purchasing power parity (PPP) basis, in 2013. Over the last five years, the country’s GDP growth movement were in sync with its industrial production. With the IMF anticipating the economy to grow by 1.7% in 2014 and 3% in 2015, one can gather a fair idea about the growth prospects of the machinery industry.

Read all