Chinese monetary policy expert spills the beans, but not to the West

Warning from top Chinese monetary policy maker

My translation of a report in Economic Daily (Jingji Ribao) on the July 20, 2014 interview with Chen Yulu re. RMB internationalization follows below.

Note: RMB is the acronym for China’s national currency, the renminbi, also known as the yuan (not to be confused with the Japanese yen). Renmin means “the People” in Chinese, while “bi” means currency – hence, the People’s currency.

Background: As of 2013, the RMB has been convertible in current accounts (but not capital accounts). Until then, if you wanted to convert the RMB into one of the non-dollar currencies, you generally had to first convert your RMB into dollars, a cumbersome process that discouraged investors from making many transactions.

Why I decided to translate this article:

I first found this article in a Japanese language translation and decided to find the original, linked below.

Not at all surprisingly, I found no translation of it into English anywhere (except for an atrocious machine rendition that does not merit the descriptor “translation”). Why no surprise? I had already had experience with the huge black holes in the Western financial press, as reported here (the term “dedollarization” in that report is for all intents and purposes synonymous with “RMB internationalization”as used hereinbelow).

Why this article was not run in the Western press:

While many of the facts cited by Mr. Chen are to be found in the Western press and also in English language articles posted in China (for example, by the Bank of China), the time frames of Mr. Chen’s predictions of the RMB’s internationalization growth differ shockingly even from those reported in Chinese publications posted in English. Obviously, the Chinese don’t dare tell us the truth and I can’t blame them.

Mr. Chen tells his Asian audience that the RMB internationalization index (RII) will exceed that of all currencies except the US dollar and the euro within anywhere from 3 to 5 years, whereas other forecasts in English language journals estimate that time frame at 15 or more years. The idea seems to mitigate what most will see as bad news and to avoid any counter-measures from the Western central bankers (although it could be that they are also in on the plot). It strikes me that if Mr. Chen were just spouting hype to sell the rmb, then he and the rest of the economic bosses, eg, at the Bank of China, would post these things in English. But since they post them only in Chinese (and also allowed on Japanese site to post a translation of this interview), it seems that the West is being kept in the dark. The fact that rmb clearing centers are opening all over Europe is also an important, and ominous clue as to what is happening behind the curtain. One could make the case that the vast majority of our ‘allies’ are in fact quietly sabotaging the dollar. And if you were a European and your finances had been wrecked by the US derivatives bubble, you  would understand the sentiment behind that. In fact, the sanctions against Russia also dealt Europe a dangerous blow, and yet, their governments don’t dare defy Washington and go their own way. Think about it. France’s BNP Paribas was fined by the US for a misdemeanor that is perfectly legal in Europe and they lost 9 billion dollars to an increasingly ruthless hegemon. Who today is truly sympathetic to the US government?

The World Bank had estimated in 2013 that China’s economy “will become the [world’s] largest by 2030.” Well, that happened last week. Can you see that we are being kept in the dark? 

This article was translated by an ordinary citizen (who happens to be a professional translator) free of charge, for both investors and ordinary middle class citizens who will need to be prepared for a collapse of the dollar sooner than most would expect, at least if we trust the media that are being paid good money to prepare us but refuse to do so or are perhaps also hapless victims of normalcy bias.

Finally, while Mr. Chen says the RMB is not intended to challenge the dollar, now that the Chinese economy exceeds ours, guess what will happen to the dollar once the RMB internationalization index surpasses the dollar’s.

Hint: the main ingredient in the value of any currency is trust. Western monetary policy aims at 2% annual inflation and cheekily calls that “stabilization,” routinely causes bubbles in various markets and fosters the creation of essentially worthless derivatives denominated in the US dollar. Chinese policy has, so far at least, not fallen into anything resembling this kind of irresponsible behavior. European markets were hit hard by this corrupt US monetary policy and they are not happy. This is, in my judgment, why the RMB clearing centers have been established all over Europe (as well as elsewhere) but not in the US, whose investors apparently want to go down with their own ship.

I am convinced that all or most of our allies have lost all trust in the US government and are quietly deserting the ship.

My only question is: what took them so long?

Don Hank

Author’s email:

Internationalization of the RMB is not a challenge to other currencies

05:40, July 22, 2014 Economic Daily, I have something to say (11 participants)

Staff reporter: Zhang Wei Zhang Lichen

On July 20, the Renmin University of China issued the “2014 Renminbi (6.1546, 0.0044, 0.07%) internationalization report,” which shows that in 2013 the rmb internationalization index (RII) further accelerated. The report notes that the internationalization of the RMB is not intended to challenge the US dollar or other international currencies; the renminbi is taking on more international monetary functions, rooted in the internal demands of the international market.

Since the beginning of 2012, the People’s [Renmin] University of China has been releasing a series of annual research reports on the internationalization of the RMB, and has proposed an RMB internationalization Index (RII), which objectively describes of the extent of Chinese yuan use in overall international economic activities. The index not only tracks trends in 3 areas, namely, global renminbi-denominated trade, financial transactions and foreign exchange reserves, but enables a convenient horizontal comparison with other major international currencies. On July 20, upon release of the “2014 RMB internationalization Report,” Economic Daily reporters on issues relating to the internationalization of the RMB were granted an exclusive interview with Chen Yulu, a member of the Central bank Monetary Policy Committee and president of Renmin University of China.

According to data in a recently released report, by the end of 2013, the RII reached 1.69, as compared to 0.92 at the beginning of the year, a gain of 84%. What is the reason for this rapid growth?

Chen Yulu: The RMB internationalization Index (RII) accelerated further in 2012, due to high-growth, reaching 1.69 by the end of 2013. In contrast, over the same period the international status of the dollar remained stable, while the euro, and British pound rose only moderately, and the internationalization of the yen declined slightly.

This is because China is number one in global trade, and currently has the world’s second largest FDI (Foreign Direct Investment) inflows and the third largest direct investment outflows. In cross-border trade, more and more companies are using RMB settlement. In 2013 the share of trade in goods settled in RMB exceeded 10%. In terms of investment, foreign direct investment in RMB 448.13 was billion while overseas direct investment amounted to 85.61 billion RMB, the total reached 1.9 times over the same period last year. This is the main reason for the rapid growth in the RII.

According to the latest data, in 2014, the first and second quarter RII’s were 1.74 and 1.96, respectively. By the end of this year, based on a conservative estimate, the RII is expected to climb to 2.40. Following system reform and the release of dividend policy, RMB direct investment and credit in international markets will significantly increase. If the  BRICS Development Bank and the China Latin America Cooperation Forum proceed smoothly, an optimistic forecast for the RII by the end of 2014 might be in excess of three. Barring any major adverse events, the international use of the renminbi will exceed the levels of the yen and the British pound in anywhere from 3 to 5 years, with the RMB becoming the world’s third largest currency after the dollar and the euro.

The accelerated process of RMB internationalization seems to suggest a challenge to the status of dollar, the euro and other international currencies. What do you think?

Chen Yulu: The internationalization of the RMB is not going to challenge the dollar or other international currencies. In fact, the RMB is assuming more international monetary functions as a result of internal demand in the international market. In particular, the international financial crisis in 2008 demonstrated that there are significant contradictions in the current international monetary and financial landscape. For example, the United States accounts for 20% of the global total economy, but supplies 52% of international currency as a public good. The spirit is willing but the flesh is weak. In the last two years, a number of international financial centers in Europe have been actively showing intensive demand for RMB-traded products, and have signed RMB clearing agreements with China. This shows that the RMB internationalization is a phenomenon that has developed in response to adjustments in international economic and trade patterns, with the chief motivation coming from international market demand. China’s push can be seen as an echo of this demand.

Secondly, China has become the world’s second largest economy, and this entails a greater responsibility and obligation to provide global public goods, including the response to the global liquidity shortage. Thus it has become the lender of last resort, participating in global currency market rate pricing, establishment of a stable international currency exchange rates system and so on. Due to China’s own increased economic strength, this is the default option for creating a stable monetary and financial environment for global economic development.

We also need to note that the yuan is far from becoming a core international currency, and does not pose a threat to the status of the dollar or the euro. Therefore, we need to consider the larger pattern and see the internationalization of the RMB as a natural response to adjustments in the international economic and financial situation, without assigning it too many other interpretations.

Currently, the establishment of offshore markets is the main thrust of the RMB internationalization process. Can you give us an overview of the global offshore RMB market? How will it impact the development of Chinese enterprises and financial institutions

Chen Yulu: Hong Kong is still the world’s largest offshore yuan market, where we find not only the most important clearing platform of cross-border trade in RMB, but also the largest pool of offshore renminbi funds. The central government has expressed clear support for entering a new stage of domestic development following the construction of offshore financial centers in Hong Kong. Elsewhere in Asia, in addition to Singapore and Taiwan and Macau, Seoul has followed suit with the signing of an RMB clearing agreement.

A number of international financial centers in Europe, such as London, Frankfurt, Luxembourg, Paris and Zurich are actively expressing the desire to establish offshore financial centers. This year, China signed RMB clearing agreements with Germany, Britain, France, Luxembourg and other countries. This is likely to cause a reversal, with the size of the European market lagging significantly behind Asia. In addition, almost all international financial centers are being established on fears of falling behind in the offshore renminbi business. This means that in addition to Asian high yield and European new markets, the RMB offshore market development will be a fast-growing trend in the global situation.

From a domestic perspective, the offshore market provides domestic enterprises new financing channels, and allows companies to take advantage of low-cost funds in overseas markets, solving difficult financing problems; at the same time, it also provides a financing platform for enterprises “going offshore,” and is conducive to fostering international competitiveness in local multinational companies. In addition, the offshore market can encourage Chinese financial institutions to accept otherwise-daunting international competition, improve service levels and innovation capacity as quickly as possible, and for China’s benefit, create favorable conditions for carrying forward capital account reform.

What challenges is the establishment of current offshore yuan markets facing?

Chen Yulu: Right.  Although the establishment of offshore renminbi markets is accelerating, some of the main obstacles must be overcome as quickly as possible. First, we  lack an efficient, secure and cost-effective offshore renminbi clearing system. This affects the willingness of domestic and foreign enterprises and financial institutions to use the renminbi and restricts the scope of offshore renminbi transactions. We need to set up a global offshore RMB clearing system of international scope as soon as possible, transforming it into a gross settlement system functioning in real time corresponding to the operating time.

Second, the current legal framework for offshore RMB market system has not yet been established. The establishment of the offshore RMB market must tackle conflicts in the field of international law, improving as soon as possible the terms of confidentiality, and implementing strict anti-money laundering procedures to curb the use of offshore financial centers to achieve illicit transfer of funds abroad. We also need to strengthen tax collection of international taxes on Chinese territory, to combat tax evasion and prevent loss of tax revenue.

Third, the offshore renminbi financial product chain and financial service capabilities of financial institutions are not yet ideal. The offshore business of Chinese financial institutions in general is still restricted to the traditional deposits, loans and international settlement business. There is an urgent need to achieve breakthrough innovation in financial product development. In addition to requiring more Chinese financial institutions to take on added functions, we must also encourage foreign financial institutions to develop businesses and innovative products.

Fourth, once the offshore financial market reaches a certain size, it will impact on the mechanism of onshore market interest rate and exchange rate formation, which may weaken the effectiveness of monetary policy, creating new challenges for the domestic financial regulatory system. Offshore renminbi market transactions will make interest rate and exchange rate determining mechanism more complex, and even affect yuan pricing. This requires the combination of two-rate marketizing reform, and the application of the scientific method in research and in the regulation of the monetary policy system. Establishment of a new macro-prudential financial regulation mode, accommodation of the offshore market within the monitoring range, strengthening international cooperation in financial supervision, and ensuring a smooth-running offshore RMB markets, and rapid, sound development.