The Renminbi’s Journey to the World

As China's currency becomes more popular internationally, the country will have less need to hold US dollar assets.

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BEIJING – Recently, HSBC bank released an upbeat survey predicting that China’s currency, the renminbi (RMB), will become one of three global settlement currencies (alongside the dollar and euro) sometime this year. It seems that the RMB’s internationalization has been progressing without anyone really noticing. The key remaining questions concern whether or not the RMB will become an important international currency anytime soon, and whether it is poised to pose a serious challenge to the US dollar’s domination of the international monetary system.

 

China has made progress in the use of the renminbi (RMB) as a settlement currency [GALLO/GETTY]

An international currency is used and held beyond the issuing country’s borders, and plays the role of unit of account, medium of exchange, and store of value for residents and non-residents alike. Certainly, there are many potential benefits for China to be gained from the RMB’s internationalization:

·        Elimination of exchange-rate risks to which Chinese firms are exposed;
·        Greater funding efficiency for Chinese financial institutions, thus strengthening their competitiveness in global financial markets;
·        A boost to China’s trade with its neighbors, owing to the reduction in transaction costs;
·        Less need for China to hold US dollar assets and risk capital losses on the country’s foreign-exchange reserves;
·        Eventual status as one of the world’s major reserve currencies, which would provide China more freedom to maneuver in domestic and international economic policy.

China’s enthusiasm for RMB internationalization since 2009 partly reflects its frustration with the lack of progress in reforming the international financial architecture, and with the state of regional financial cooperation. Chinese officials believe that RMB internationalization is a way for China to set its own agenda without being overly constrained by external conditions beyond its control.



Thus far, China has made significant progress in the use of the RMB as a settlement currency, in the issuance of RMB-denominated bonds, and in signing currency-swap agreements with foreign central banks. RMB deposits in Hong Kong are growing exponentially.

Despite these achievements, however, RMB internationalization could still easily go awry. For example, various incentives have been provided to encourage enterprises to use the RMB to settle transactions. But, with an undervalued exchange rate and strong expectations for the RMB to appreciate in the future, foreign importers of Chinese products refuse to use the RMB to settle transactions, while foreign exporters are happy to accept RMB. As a result, even with the same trade balance, China ends up with more foreign-exchange reserves, though using the RMB as a settlement currency is supposed to reduce their accumulation.

Indeed, so far, RMB internationalization has shown a clear pattern of asymmetry – and not only as a settlement currency for China’s imports, but not for exports. RMB-denominated bonds meet strong demand, yet non-residents have no great incentive to issue them. And, while foreign lenders are happy to extend RMB loans, they are not welcome by foreign borrowers. Given strong expectations of RMB appreciation, internationalization will inevitably lead to a serious currency mismatch, with possibly detrimental consequences for China’s welfare.

A more fundamental problem for RMB internationalization is what it implies for China’s capital controls. Although the internationalization of a currency is not tantamount to capital-account liberalization, the degree of internationalization is conditional on capital-account liberalization. In fact, internationalization of the RMB has opened a new hole in China’s wall of capital controls. The big increase in RMB deposits in Hong Kong is a case in point.

When a currency endures a prolonged process of one-way appreciation, speculative capital aimed at exchange-rate arbitrage is bound to seek all chances to flow in. Hot money will increase currency appreciation pressure and complicate macroeconomic management. The profit-taking by speculators at the end of the game will lead to huge welfare losses to the recipient country, in this case China.

Fear of hot money was the main reason why China refused to de-peg the RMB from the dollar until July 2005. While China did decide to allow the RMB to appreciate gradually after that, it has relied on capital controls to prevent hot money from flowing in. The controls are leaky, to be sure, but they have worked (so far), which is why China has effectively maintained macroeconomic stability over the years.

The key objective of China’s capital controls is to prevent non-residents from holding domestic RMB-denominated assets that are unrelated to trade and long-term capital flows. But RMB internationalization encourages non-residents to hold more RMBs and RMB-denominated assets. As a result of RMB internationalization, RMB deposits held by Hong Kong residents have reached RMB370 billion ($57 billion), and the amount may reach RMB1 trillion by the end of the year.

One might wonder what difference there is between hot money and RMB deposits held by non-residents. The answer depends on why non-residents hold these deposits. The attraction of the RMB should come from China’s strong economic fundamentals and faith in its economy. If it comes from expectations of RMB appreciation, the success of RMB internationalization can be easily reversed and will cause more problems for China’s monetary authority to solve in the future.

Fortunately, China’s monetary authority has already noticed the subtlety of the distinction between legitimate demand for RMB-denominated assets and hot money. This means that the pace of RMB internationalization could become more measured than international investors have expected.

While internationalization of the RMB is necessary (and inevitable), it should be guided by market principles and pursued in a cautious manner. To get the sequence of policy adjustments right is vital. In any case, the RMB’s path to becoming a truly international currency promises to be a bumpy one.

By Yu Yongding, currently President of the China Society of World Economics, is a former member of the monetary policy committee of the Peoples' Bank of China and former Director of the Chinese Academy of Sciences Institute of World Economics and Politics.
 

Copyright: Project Syndicate, 2011. www.project-syndicate.org

They can try to ‘delay and pray’ but the euro is running out of time!

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As a doomsayer from the start, who has written several times on the subject, I have recently been reluctant to burden my readers with more jeremiads about the euro.

'Why is the euro in crisis? Because it was fundamentally flawed at its inception' Photo: GETTY

But fasten your seatbelts. Here I go again. My excuse is that this crisis keeps surprising the unwary. There is so much to say that I will have to have several bites.

Before we can find solutions, which I will discuss at a later date, first the causes. Why is the euro in crisis? Because it was fundamentally flawed at its inception. Only good luck, strong economic growth and enlightened economic management could keep it together. In fact, the eurozone has had to suffer the opposite of all three.

Giving up sovereign currencies is a serious challenge. Exchange rates act as a safety valve. When you remove them, the pressure either has to be reduced or it will find some other way out. In a fixed exchange rate system, such as the ERM, currency speculation could and did break the system. Advocates of the euro project drew comfort from the fact that, by contrast, a full monetary union is immune from such attacks.

It was recognised that economic and financial pressure might still find an outlet as countries which diverged from the core had to face higher bond yields. But this would be a good thing. The prospect of it should serve to restrain them. It wasn’t imagined, though, that strain in the bond markets could threaten the stability of the euro itself.

 Failures

Four things went wrong. The first two were private sector failures. First, far from reacting to their newly shackled state, Spain and Ireland went on a private sector spending spree. (Meanwhile, in Greece the government led the bonanza.) Second, in all these cases, the bond markets were hopeless at foreseeing possible difficulties and imposed bond yields only marginally higher than on Germany. Accordingly, they provided no restraint at all.

The third and fourth were failures of government. The authorities presided over an extremely shaky banking system, acutely vulnerable to shocks. And their policies over many years resulted in a high government debt to GDP ratio, not only in the peripheral countries, but also in the supposedly solid core. In common with almost everyone else, the European authorities grossly underestimated the possibility of sovereign default as a realistic threat and market worry, and underestimated its capacity to cause a full scale banking crisis.



The fact that the political elite ploughed on with the euro project was the result of profound arrogance. Where possible, electorates would be denied the chance to say whether they approved of the euro and other aspects of integration. Where they had to have their say, they would be compelled to go on voting until they said “yes”. The current crisis has the same roots. The project’s difficult economics would be overcome by the politics. The Brussels establishment would ensure that everything turned out all right.

But it hasn’t. Now the economics threaten to overwhelm the politics. Greece’s sovereign indebtedness is so high that it is impossible to see how it can honour its debts without outside help (ie. gifts). And the economy will go on contracting for years. There will have to be “an event”. The only issues are when this will happen; who will pick up the tab; and what it will be called.

 Nomenclature

This being the European Union, nomenclature is extremely important. Of course it won’t be called a default – I doubt it will be called anything beginning with “de”. Bad things begin with de – like decline and defeat. It will be called something beginning with “re”. Good things begin with “re”, including rebirth and renewal – and restructuring and reprofiling. But default it will be.

Who picks up the tab is important because the bill could seriously undermine some banks. Remarkably this threat includes the ECB itself because it has taken on a large amount of Greek debt. The rows over the bill are likely to delay any sort of solution and to poison the atmosphere between member states. Meanwhile, the fate of the European banking system will be hanging by a thread.

This is why the “when” issue is so important. The current approach is to try to stave off the event until things get better. You will notice that this bears a striking similarity to the sophisticated strategy adopted by British banks in the face of dud commercial property loans, namely “delay and pray”. Mr Micawber had the same idea but expressed it differently.

So even though the markets cannot cause the euro to break up by exchange rate pressure, they can cause an internal financial crisis worse than any currency panic. The prospect, or the reality, of such a crisis could yet cause some European leaders to precipitate the end of the euro as we know it.

By Roger Bootle who is managing director of Capital Economics and economic adviser to Deloitte.

Blogging can really pay off

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My Blog Is Also Paying My Bills

By KATE MURPHY                                       Jim Wilson/The New York Times     

Darren Kitchen, shown with Shannon Morse, a host on his webcast, sells items on his computer-hacking Web site.

Casting the digital equivalent of a message-in-a-bottle into the Internet’s vast sea of content, many people start Web sites or blogs hoping that they will find an appreciative audience for their precocious parrot videos, cupcake recipes or pithy commentary on everyday life. The dream, of course, is that they will develop a large and loyal following — and potentially profit from it.

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• Times Topic: Blogs and Blogging (Internet)

Kyle Johnson

Molly Wizenberg, 32, of Seattle, started her blog, Orangette, in 2004. It led to the publication last year of her book, “A Homemade Life: Stories and Recipes From My Kitchen Table.”

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Bron Johnson

Participants in a workshop on personal growth in Las Vegas, a result of Steve Pavlina's blog. He said he made $40,000 from the workshops.

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Cloud photos taken by Kelly DeLay on his Web site, the Cloud 365 Project. Visitors donate a total of $200 to $400 a month to the site. 

While most of these self-publishers don’t attract the attention of anyone other than indulgent family and friends, there are those who find wider recognition and some income. What the successful have in common is a passion for their subject and a near-compulsion to share what they know. Advertising, merchandising, offline events, book deals, donations and sometimes sheer luck also play a part.

“My advice is to choose a topic you’ll never get tired of,” said Stephanie Nelson, 47, of Atlanta, a homemaker who founded CouponMom.com in 2001 to share tips on saving money by using coupons. “The first three years I made no money at all, so I had to love what I was doing to keep going.”

Ms. Nelson said her Web site now has more than 3.8 million visitors a month, and the income it generates supports her family of four — allowing her husband to retire early from his corporate job five years ago. “I’m still not tired of it,” Ms. Nelson said.

Half of the site’s revenue comes from Google’s AdSense service, and the other half is from companies like Groupon and LivingSocial that buy ads directly from her. AdSense generates ads based on the words that appear on Web pages. For example, if a blog post is about dogs, ads for dog food or dog grooming might appear beside it.

Many of the Google ads generate income only if people click on them — usually yielding a fraction of a cent per click. It’s also possible to get paid every time a Google ad appears on a page. Rates are determined in part by advertisers bidding in an online auction.

Other companies like BuySellAds.com and BlogAds allow self-publishers to determine what they want to charge for placing an ad on their sites. They then match sites with eager advertisers for a percentage of ad sales — 14 to 30 percent is typical.

Federated Media, which is a sort of Web talent management company, is more selective, negotiating rates on behalf of independent content creators it agrees to represent. In general, online ad rates vary widely, from $54,000 a day for an ad on a popular blog like PerezHilton.com to $10 a month for an ad on the cartoon blog The Soxaholix. (The New York Times Company is an investor in Federated Media.)

Clayton Dunn, 32, and Zach Patton, 31, the bloggers behind The Bitten Word, make around $350 a month from pay-per-click Google ads, and in commissions from Amazon.com when readers follow links to cooking gadgets, books and magazine subscriptions they recommend. Mr. Dunn and Mr. Patton, who live in Washington and blog about recipes they have tried from popular magazines, started the site in 2008 and now have about 150,000 visitors a month.

“It more than pays for the groceries,” said Mr. Dunn, who added that they are further compensated by readers who may give them delicacies like fresh avocados and Hawaiian ginger syrup.

For those who want to generate more income through advertising, Jonathan Accarrino of Hoboken, N.J., founder of the technology news and how-to blog MethodShop.com, advises having contextual ads, which are highlighted words in posts that provide a link to the vendor of a relevant product or service. A commission is paid on resulting sales.

Adding video to a post is another strategy that Mr. Accarrino said contributes to his blog’s six-figure yearly income: “I’ll record video walk-throughs of my tutorials and upload them to Blip.tv,” a video sharing service similar to YouTube. And like YouTube, Blip.tv gives users the option to run ads with their videos. These generate $1 to $10 for every thousand views, depending on the advertiser.



Indeed, many video bloggers, or vloggers, make money this way. Sheila Ada-Renea Hollins-Jackson, a 22-year-old makeup artist in Farmington, Mich., makes up to $200 a month from the 63 videos about beauty treatments she has posted on YouTube since 2008. “It pays my cellphone bill,” she said. Vloggers either apply or are invited by YouTube to display ads based on demonstrated viewership or outstanding content.

Selling merchandise on a vlog, blog or personal Web site can bring in even more cash. Darren Kitchen, 28, of San Francisco said he makes $5,000 a month selling stickers, T-shirts, baseball caps and computer hacking tools on his Web site, Hak5.org, which offers a weekly video show about computer hacking.

“It’s crazy how many people want the stickers,” said Mr. Kitchen, who started Hak5 in 2005 and says he has 250,000 monthly viewers.

Book deals are the ultimate goal for many bloggers who are aspiring writers. Molly Wizenberg, 32, of Seattle, started her blog, Orangette, in 2004 as a way to hone her writing skills after dropping out of a Ph.D. program in anthropology.

Her musings about food and life attracted 350,000 visitors a month and the attention of Simon & Schuster, which led to the publication last year of her book, “A Homemade Life: Stories and Recipes From My Kitchen Table.” Last month she signed a contract to write another book. “It’s beyond what I ever imagined,” Ms. Wizenberg said.

Some people simply ask their fans and followers to make donations to support their creative efforts. Kelly DeLay of Frisco, Tex., said he gets $200 to $400 a month from visitors to his Web site, The Clouds 365 Project, where he posts a daily photograph of cloud formations. “People can be very generous,” said Mr. DeLay, who began taking pictures of clouds full-time after he was laid off from his job as an interactive media director last year.

Charging for content is also an option. Collis Ta’eed, 31, of Melbourne, Australia, founded FreelanceSwitch.com, which gives practical advice to freelancers, and Tuts+, which offers technology-related tutorials. He said he brought in $150,000 a month from his sites, most of it from premium content — primarily tutorials and e-books.

“People will pay for content if you offer them something of value that is authentic and is generally useful,” said Mr. Ta’eed, who said his two blogs together have 6.4 million visitors a month. One example of useful content is FreelanceSwitch’s job board, which brings in $7,000 a month, he said. Job posters pay nothing; job seekers pay $9 a month.

And sometimes people will pay to attend events organized by bloggers they admire.   Steve Pavlina of Las Vegas said he made $40,000 from weekend workshops that were an outgrowth of his blog,
StevePavlina.com, which focuses on issues related to personal development. He started the blog in 2004 and says it has 2.5 million visitors a month. Besides workshops, he said he made about $100,000 a month in commissions from sales of products like speed-reading courses and high-speed blenders that he recommends on his blog.

“I tell people if they want to start a blog just to make money, they should quit right now,” Mr. Pavlina said. “You have to love it and be passionate about your topic."