Sunday, July 5, 2009

Forging Ahead

In an attempt at getting back into news blogging, I searched through Google News for China articles today. There's a lot going on here in the Middle Kingdom. I'm going to try to highlight a few of the pieces I found most interesting.

First, on the changing role of China's currency from The Financial Times:

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China has taken another step towards internationalizing its currency and reducing reliance on the US dollar with the announcement of new rules to allow select companies to invoice and settle trade transactions in renminbi.

The regulations released by the People's Bank of China, the country's central bank, will allow approved companies to settle transactions through financial institutions in Shanghai and other cities in southern China.

Offshore, the trial scheme will allow transactions to be settled in renminbi in Hong Kong and Macao, the two self-governing territories on China's southern borders, and later in a limited fashion in south-east Asia as well.

Importers and exporters will be able to place orders with authorised Chinese companies, and settle payment for them, in renminbi.

Although it has no short-term implications for the full convertibility of the renminbi, the announcement adds to the volley of political signals Beijing has sent recently over its dissatisfaction with the US dollar.

"To many minds in China the US dollar's time is almost up, the eurozone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favours," said Stephen Green, of Standard Chartered, in Shanghai.

"For them, the renminbi is an obvious, and imminent, replacement."

Far from being a replacement for the dollar as a freely-traded reserve currency, the move has been justified by the PBoC initially as assisting exporters buffeted by the greenback's fluctuating value.

Read On
Until now, China's yuan/RMB has not been an international currency. So, as I understand it, the currency is only capable of being used in the People's Republic of China.

I just did a bit of searching on why this has been the case. I couldn't find much except from this Wikipedia article on the Chinese RMB:
The second series of renminbi banknotes was introduced in 1955. During the era of the command economy, the value of the renminbi was set to unrealistic values in exchange with western currency and severe currency exchange rules were put in place. With the opening of the mainland Chinese economy in 1978, a dual-track currency system was instituted, with renminbi usable only domestically, and with foreigners forced to use foreign exchange certificates. The unrealistic levels at which exchange rates were pegged led to a strong black market in currency transactions.

In the late 1980s and early 1990s, the PRC worked to make the RMB more convertible. Through the use of swap centres, the exchange rate was brought to realistic levels and the dual track currency system was abolished.

The renminbi is convertible on current accounts but not capital accounts. The ultimate goal has been to make the RMB fully convertible. However, partly in response to the Asian financial crisis in 1998, the PRC has been concerned that the mainland Chinese financial system would not be able to handle the potential rapid cross-border movements of hot money, and as a result, as of 2007, the currency trades within a narrow band specified by the Chinese central government.
China is seeing the present-day as the time when it can life its controls on the yuan and begin implementing it as an international currency. Although the role of the Chinese yuan is changing, China says that the country is still fully committed to the US dollar and that the internationalization of the yuan will not challenge the US dollar as a world reserve currency in the near future.

Regardless of exactly how the yuan develops internationally, these steps from China towards getting the yuan out on the international market are a significant event.

The second article, from a few days ago in The New York Times, is about China's investment into oil in Iraq:

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HONG KONG — Oil companies from China, the world’s second-largest and fastest-growing consumer of oil, bid aggressively on Tuesday as Iraq began auctioning licenses in six large oil fields.

A partnership of BP and the China National Petroleum Corporation, or C.N.P.C., won the first contract awarded, in the latest indication of Chinese interest in Iraq, a country that has until recently seemed to be firmly in the American sphere of influence for natural resources.


Few Americans or Iraqis may have expected China to emerge as one of the winners in Iraqi oil, particularly after six years of war. But signs of stability in Iraq this year, and a planned American military pullout from Iraqi cities on Tuesday, happened to coincide with an aggressive Chinese push to buy or develop overseas oil fields.

The Chinese companies “have been interested in Iraq,” said David Zweig, a specialist in Chinese natural resource policies at the Hong Kong University of Science and Technology. “They were interested in Iraq before the war, and now that things have improved somewhat there, it’s on their agenda.”

Some experts contend that the West should not be concerned about a substantial Chinese presence in Iraqi oil fields, because it gives China greater stake in improving stability in the region.

“If you want China to be a responsible stakeholder in the world, you need to let China buy stakes in the world,” said Mark P. Thirlwell, the program director for international economics at the Lowy Institute for International Policy in Sydney, during a speech in Hong Kong on Tuesday.

Read On
It's great to know that the 4,323 US soldiers killed in Iraq so far and thousands upon thousands wounded have expanded the universe of Chinese oil resources.

And third, from The International Business Times on China's stock market:

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A nice little bubble is simmering away in China: not the vaunted stimulus-induced recovery, but the country's stockmarket which is becoming increasingly heated.

Chinese shares closed higher again on Friday, a phrase that has become all too monotonous in recent months as the market has soared.

Chinese shares have now jumped 65% since the beginning of this year.

Media reports suggest that tens of billions of dollars in bank loans are riding in the market; stimulus money that is being parked to earn big profits by banks and other companies before it's spent.


The surge in China has all the appearances of an emerging bubble, especially with reports in the local media of high prices being paid for property in Beijing and some other major coastal cities.

Read On
In a taxi last week in Beijing, Qian had a conversation with the driver that I could kind of follow along with. She was asking him about real estate prices. The driver told her that the prices are continuing to go higher and higher in Beijing.

I couldn't believe this.

One of the most striking things to me about Beijing is the endless skyline of twenty-or-so floor apartment blocks. When coming back from the Great Wall with our friends, I asked, "Are we getting into Beijing now?" Our friend who lives in Beijing responded, "No, not yet. There aren't any high-rise apartments around us. That's when you know you're starting to get into Beijing."

My friend, Elliot, had a good point. The sprawl that surrounds Beijing is vast. And the amazing thing is the ubiquitous scene of cranes putting up new apartment buildings.

I understand that Beijing is a massive city of about thirteen million people and those people all have to live somewhere. But it seemed to me, from being in the city, that the apartment situation is getting a bit insane.

To hear that China's stock market surge is, at least partly, being fueled by high real estate prices is concerning to me. I don't see how real estate prices can continue to rise when there are already so many apartment and so many more are going up and the world is mired in a once-in-a-lifetime economic crisis.

I've talked before about Beijing's unfathomable commercial real estate glut.

This post was fun. Hopefully I can continue to find time to make posts like these.


Anonymous said...

Speaking of China, do you think that this ( will have severe long term effects at all?


Ramesh said...

Nice post. Yes, the stock market bubble is loooming again - it appears little lessons were learnt from last year. Unfortunately many people may get hurt yet again. It appears greed, as a basic human emotion, is impossible to conquer !!