China itself provides main hurdle to currency ambitions

Money outflows by Chinese citizens, mostly from wealthy officials and businessmen, makes it extremely difficult for Beijing to keep the exchange value of the RMB stable and push forward the internationalisation programme.

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Saibal Dasgupta

The biggest challenge for China’s efforts to internationalise the yuan, or renminbi (RMB), is from within the country, and not so much from external sources such as international currency speculators, analysts say.

Money outflows by Chinese citizens, mostly from wealthy officials and businessmen, makes it extremely difficult for Beijing to keep the exchange value of the yuan stable and push forward the internationalisation programme.

"Outflows by Chinese citizens exceed US$50 billion a month," Christopher Balding, a professor at HSBC School of Business Peking University, tells The National. "This is forcing China to spend huge sums to keep the RMB from falling."

The People’s Bank of China, the central bank, routinely spends a huge amount of dollars to buy out the yuan, which is sent overseas by Chinese people and businesses to increase dollar savings abroad.

Keeping the yuan stable is important for authorities to check the outflows by Chinese citizens. A weak yuan and a strong dollar can open up the floodgates with Chinese people sending out more money to the United States.

“If the yuan depreciates too rapidly, domestic savers may lose confidence in the domestic financial system and precipitate bank runs et cetera, which could quickly turn into a very nasty economic crisis,” says Jacob Kirkegaard, a senior fellow at the Washington based Peterson Institute of International Economics.

The reluctance towards devaluation is so strong that the Chinese premier Li Keqiang referred to it at a dinner hosted by the New York Economic Club last week.

“In a word, there is not a basis for continuous devaluation of the Chinese currency, and China has no intention to use the devaluation of the currency to boost export, because that is not good for China’s economic upgrading,” Mr Li said.

The biggest tool in the government’s hands to check financial wrongdoing, including illicitly sending cash abroad, by officials and businesses is the intense anti-corruption drive launched by the Chinese president, Xi Jinping. The campaign has resulted in a large number of senior officials, business owners and even retired military commanders going to jail in the past four years.

But there is a flip side to the drive. It has scared a lot of ordinary Chinese into sending funds abroad in the hope of preserving wealth for their children and grandchildren as well as extending their businesses to foreign countries. Chinese are not only buying property across world cities, including Dubai, London, New York and Sydney, they are also buying businesses and investing in a wide range of other assets.

“China has seen $1.6 trillion worth of outflows from January 2012 to this month. This is mainly done by manipulating trade figures,” Mr Balding says. “There is a huge gap between custom figures of imports and what Chinese banks actually pay out for the purchases”.

A significant number of Chinese tourists flooding to world cities make a beeline to foreign banks to open accounts and deposit money while showing the outflows as travel expenditure, he says.

But these are China’s internal problems and do not give western officials and experts any reason to take the country to task, some analysts say.

“There’s a rich irony in the fact that the US Treasury and G20, after having admonished China for a long time to let the yuan’s value be determined by the market, is now requesting the [People’s Bank of China] to prevent too rapid currency depreciation,” says Eswar Prasad, a senior professor at Cornell.

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