Internationalizing the Yuan

China has a number of issues to deal with relating to their economic growth and history of currency manipulation. The fast growing Chinese economy has accumulated billions of dollars’ worth of assets denominated in foreign currencies. The keys to Chinese success have been first of all a cheap labor pool and significant foreign investment in Chinese industry. And second the Chinese have continually purchased US dollars on the Forex markets and purchased US government debt. This second tactic has served to keep the value of their currency unusually low and allowed them to attractively price their exports. Unfortunately for China not all good things last. First of all the recession has hit Europe hard and Europe has been China’s best customer. It has also hit North America so that neither of the two greatest economies in the world is buying as much from China. And the US government is going through a prolonged period of dysfunctionality. The threat of debt default scares China which holds billions in US denominated currency and bonds. But, where does China dump these assets without further devaluing what they hold. One solution is what China is going about doing, internationalizing the Yuan and that will lead to the Yuan fluctuation with other foreign currency exchange rates.

Internationalizing the Yuan, within Limits

Most recently Singapore and China announced direct trading between their currencies. This adds Singapore to Hong Kong, Taiwan, and London as offshore hubs for Yuan based investment. In the case of Singapore there will be a $8 billion quota (50 Billion yuan). Institutions in Singapore will be able to invest in Chinese domestic securities. The program is called the Renminbi Qualified Foreign Institutional Investor. In addition, Chinese institutional investors will be able to use Yuan to purchase available securities in Singapore. Just recently a similar program was opened in London in which direct trading between the GBP and Yuan was started. China is in the process of internationalizing the Yuan within limits. The problem China will have with internationalizing the Yuan is that they will need to let its value float against other currencies. That will be detrimental of Chinese exports if the Yuan drifts too high in international markets. Currently these markets allow the Yuan to trade within limits against the USD, Yen, AUD, GBP, and Singapore dollar. On the horizon is a program to let Chinese investors convert their Yuan for overseas investments through these limited venues.

Trading while China Is Internationalizing the Yuan

Current exchange rates are around six Yuan to the US dollar and five to the Singapore dollar. Volatile markets of late have raised both prospect of profit and loss in trading the Yuan. However, as China succeeds in internationalizing the Yuan they will succeed in having foreign contracts written in Yuan instead of US dollars and possibly end up being a safe haven currency even as being a safe haven currency may escape the USA. The driving force behind the relative value of the Yuan still is the desire to protect Chinese exports. However, the Chinese have to a degree painted themselves into a corner with that policy and if they want to be successful in internationalizing the Yuan they will need to let it float and that could spell profits for traders who are adept at predicting changes in foreign currency rates.