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.

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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:

New U.S. Trade Offices in Africa

from http://allafrica.com/

“As a new member of the Department of Commerce team, I’m very excited to be a part of this major expansion,” U.S. Assistant Secretary of Commerce for Global Markets Arun Kumar said in an April 28 Commerce Department blog post.

U.S. Secretary of Commerce Penny Pritzker announced the expansion of trade offices on April 17. She said that, in 2014, the Commerce Department’s International Trade Administration will open offices in Angola, Ethiopia, Mozambique and Tanzania, in cooperation with the U.S. Department of State. These four new offices, in addition to one to be opened in Burma, will bring the knowledge and experience of U.S. trade specialists into some of the world’s most rapidly developing economies.

Sub-Saharan Africa is one of the fastest-growing economic regions in the world, Kumar pointed out in his blog post, adding that the International Monetary Fund predicts continued growth throughout the continent, as part of a broad continental economic transformation.

Global Economy Improvement Analysis. Knock on Wood

Global Economy Continues To Improve (Associated Press)

The world’s top finance officials say the global economy is recovering, and they’re hopeful that well-run economic programs will avoid the risks that threaten that rebound. The 188-nation International Monetary Fund concluded talks Saturday with pledges to work toward faster growth that will alleviate still-high unemployment. Managing Director Christine Lagarde told reporters that the world had gone through a lengthy economic “disaster” and now was moving through a period of strengthening growth.

Finance Ministers: Economy Stronger but Fragile (ABC News)

The world’s top financial officials say they believe the global economy is strengthening but that growth remains fragile and open to risks of new geopolitical strife, as in Ukraine.

Rich countries have been helping power the recovery led by the United States and Britain, and the eurozone and Japan are doing better. However, there has been some slowing in major emerging markets such as China even though these economies have been powering along at growth rates ahead of developed nations. Many countries still are experiencing painfully high unemployment rates with millions looking for work.

The conclusion of discussions Saturday at the International Monetary Fund and its sister institution the World Bank ended three days of talks that began with meetings by finance ministers of the Group of 20 nations, the mix of traditional economic powers such as the United States, Japan and Germany and emerging economies such as Brazil, India and China. “Creating a more dynamic, sustainable and job-rich global economy remains our paramount collective goal,” the policy-setting panel of the 188-nation IMF said in a closing communique. Read full article.

Raising World Economy’s Speed Limit Emerges as Challenge (Bloomberg News)

Global finance chiefs are trying to soup up their crisis-hit economic engines.

How to do so was a theme of weekend talks of the International Monetary Fund’s spring meetings in Washington as economists from JPMorgan Chase & Co. estimate the financial crisis and subsequent world recession knocked the potential growth rate of rich countries down to about 1.5 percent from 2 percent.

Such a decline in the speed limit of the growth rate at which inflation ignites is troubling because it risks pressuring central banks to raise interest rates sooner than they might otherwise want. The weaker potential also hurts the ability of businesses to boost profits, workers to win pay increases and governments to cut debts. Read full article.

 image from www.fas.org

FSB Says Improving Economy Doesn’t Reduce Need for Strong Banks

By Ben Moshinsky and Jim Brunsden for Businessweek

The Financial Stability Board said banks and regulators must press on with reforms to safeguard the financial system even as the global economy recovers.

“The improved global outlook does not diminish the need to continue to strengthen financial resilience,” it said in a statement after a meeting in London yesterday led by Chairman Mark Carney.

While the International Monetary Fund sees the world economy growing 3.7 percent this year, it has said there are downside risks, including financial-market volatility in emerging markets. The MCSI Emerging Markets Index has risen 0.6 percent in the past six months, lagging an 8.4 percent advance in the MSCI World Index.

Part of the emerging-market turmoil was related to capital outflows as the Federal Reserve unwound its stimulus program and tensions between Russia and western governments over Ukraine. Emerging market stocks rose yesterday after Fed Chair Janet Yellen signaled that economic support would continue for “some time.”

Financial markets “should be prepared for the possibility of sharp adjustments in interest rates, exchange rates, valuations of financial instruments, market volatility and liquidity,” the FSB said in yesterday’s statement. “Some emerging markets may experience a combination of slower growth, capital outflows and higher borrowing costs which may expose vulnerabilities.”

The FSB also said that it was on course to deliver a package of proposals for tackling too-big-to-fail banks to a November summit of global leaders in Brisbane, Australia.

Structural Reforms

The group’s plans include a probe into “the cross-border impacts and global financial stability implications of structural banking reforms.”

Banks have warned that they face a growing wave of different structural requirements from regulators, ranging from the U.S. Volcker Rule to curb proprietary trading, to the so-called Vickers plans in the U.K. that will require some lenders to separately capitalize their deposit-taking arms.

Proposals put forward earlier this year by Michel Barnier, the EU’s financial services chief, have been criticized by European Parliament legislators as inadequate to deliver a common European approach.

While structural rules “help address the too-big-to-fail problem,” they can also have “impacts on financial institutions and markets in third countries,” the FSB said.

At a press conference yesterday, Carney said the FSB wants lenders and the International Swaps and Derivatives Association Inc., an industry group, to come up with proposals to write temporary pauses into derivatives contracts struck with banks that hit financial trouble.

Lehman Collapse

The measures could prevent the type of turmoil in markets seen with the collapse of Lehman Brothers Holdings Inc in 2008, regulators have said.

There is “no lessening” on the focus on so-called contractual stays in derivatives, said Carney, who is also governor of the Bank of England.

The FSB’s financial regulation plans include a June report on boosting the reliability of financial benchmarks. The board is co-ordinating regulators’ work to identify alternatives to scandal-hit benchmarks such as the London Interbank Offered Rate.

The FSB, a group of global regulators and central bankers, announced in February that it was widening its review to include rates underpinning the foreign exchange markets. The FSB working group on currency benchmarks will make recommendations to the Brisbane summit of G-20 leaders, Carney said.

Other initiatives to be completed by the Brisbane summit include the development of a “basic capital requirement” for insurers, the FSB said.

 image from: http://www.treasury.nl/