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China spreads its currency at Global level by establishing First Yuan clearing Bank in US

Chinese officials have undergone years of toil and entered into more than 20 currency swap agreements to give the RMB a global image

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FILE - Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. -VOA
  • China established the first clearing center for the Chinese yuan in the US
  • China wishes to enter the US financial markets with RMB business to challenge the US dollar on its home turf
  • The way Chinese currency is declining at the rate they are now, there will be no RMB available outside China in 18 months

September 23, 2016: China this week established the first clearing center for the Chinese yuan, or RMB, in the United States. The move is seen by some as a signal China wants to take on the dollar on its home turf.

But there is more than a sense of bravado behind the decision. This is a crucial time for the RMB, which is struggling to stay on course while preparing to enter the coveted currency basket of International Monetary Fund’s Special Drawing Rights (SDR) on October 1st.

In financial terms, there was no reason to establish an RMB clearing center as the U.S. market can easily be serviced through dedicated RMB centers in other parts of the world.

FILE - Chinese paramilitary police march past China's central bank, the People's Bank of China, in Beijing, March 12, 2016.
FILE – Chinese paramilitary police march past China’s central bank, the People’s Bank of China, in Beijing, March 12, 2016. -VOA

“But it sends the signal that China wishes to enter the U.S. financial markets with RMB business to challenge the U.S. dollar on its home turf, so to speak,” Jacob Kirkegaard, a senior fellow at the Washington-based Peterson Institute of International Economics told VOA.

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“As such, this is more a political signal than a financial necessity,” he said. “This is because the RMB rate is an intensely political figure and essentially can be taken as a proxy for ‘faith in the Chinese economy.’ “

No celebrations

Chinese officials have undergone years of toil and entered into more than 20 currency swap agreements to give the RMB a global image. But they are not going to sip wine and declare “gan bei” (bottoms up, in Chinese custom) over the yuan’s entry into the IMF’s basket for SDR a few days later.

Christopher Balding, associate professor at HSBC School of Business Peking University, said China is desperately trying to keep the RMB from crashing by spending $50 billion a month. Beijing is selling dollars out of its reserves to buy up the available yuan in the international market, he said.

“If they [Chinese officials] went on national TV and announced that they would let the market fully determine the value of the RMB, I don’t think it is a stretch to say that the RMB will drop 15-20 percent in the blink of an eye,” Balding told VOA.

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“China’s foreign investment is down 40 percent. When you couple that with the continued amount of money leaving China, that is putting a lot of pressure on the RMB,” he said.

Beijing is actually de-internationalizing its currency by sucking out the available yuan in the world markets. “If they [Chinese currency] are declining at the rate they are now, there will be no RMB available outside China in 18 months,” he said.

FILE - An exchange store staff shows a Chinese RMB$100 banknote (L) and a US$100 banknote in Hong Kong, May 16, 2006.
FILE – An exchange store staff shows a Chinese RMB$100 banknote (L) and a US$100 banknote in Hong Kong, May 16, 2006.-VOA

Battle for stability

China’s recent policy to keep the currency’s value roughly stable has been driven by its desire to avoid sharp currency moves in the lead-up to the G-20 summit that took place in China recently, and, now, the forthcoming inclusion of the RMB in the IMF’s SDR basket, according to Eswar Prasad, senior professor at Cornell University and author of an upcoming book, Gaining Currency: The Rise of the Renminbi.

“China’s government faces a conundrum that other reserve currency economies have faced in the past – how to promote the currency’s role in global finance without losing control over the currency’s value,” Prasad said, adding, “Currency management policies over the last year suggest that the government sees stability in currency markets as a higher priority than promoting the currency’s international role.”

China’s currency moves are not meant to protect or push forward its exports. Chinese exporters are not likely to gain hugely by a slide in RMB value or lose much if it was a little stronger, because many of them face little competition in the price and quality range in which they operate, experts said.

FILE - A container is loaded onto a cargo ship at the Tianjin port in China.
FILE – A container is loaded onto a cargo ship at the Tianjin port in China.-VOA

“China is most interested in maintaining basic stability of its currency and limiting volatility. Reducing expectations of substantial or sudden depreciation helps reduce capital outflows,” said Scot Kennedy, deputy director of the Freeman Chair in China Studies at the Center for Strategic and International Studies. “The recent modest depreciation is not geared to support exports.”- VOA

Next Story

“Didn’t Get Financial Help from Chinese Government in Billions”, Says Huawei

The tech behemoth also said that it reserved the right to take legal actions against the WSJ for "a number of disingenuous and irresponsible articles"

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Huawei
Huawei emphasised its research and development spending as the reason for its ongoing success, noting that over the last 30 years it has spent between 10 to 15 per cent of its annual revenue developing new technologies and products. Wikimedia Commons

Reacting to reports that it got as much as $75 bilion in state support from China, Chinese telecom and smartphone giant Huawei has denied the alleged special treatment and called them “wild accusations”.

Tens of billions of dollars in financial assistance from the Chinese government helped fuel Huawei Technologies Co.’s rise to the top of global telecommunications, a scale of support that in key measures dwarfed what its closest tech rivals got from their governments, claimed a report in The Wall Street Journal.

Reacting to it, Huawei responded in a string of tweets on Thursday: “Once again, the WSJ has published untruths about Huawei based on false information. This time, wild accusations about Huawei’s finances ignore our 30 years of dedicated investments in R&D that have driven innovation and the tech industry as a whole.”

The tech behemoth also said that it reserved the right to take legal actions against the WSJ for “a number of disingenuous and irresponsible articles”.

Huawei
Reacting to reports that it got as much as $75 bilion in state support from China, Chinese telecom and smartphone giant Huawei has denied the alleged special treatment and called them “wild accusations”. Wikimedia Commons

The company emphasised its research and development spending as the reason for its ongoing success, noting that over the last 30 years it has spent between 10 to 15 per cent of its annual revenue developing new technologies and products.

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“Every tech company in China is entitled to subsidies, as long as they meet conditions. Over the past decade, Huawei has received government subsidies amounting to less than 0.3 per cent of our total annual revenue. The figure was just 0.2 per cent for 2018,” the company added in a tweet. (IANS)