SPEAKING FREELY China's 'little dollar' spreads its wings
By Reginald Smith
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say. Please
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At the beginning of 2010, it is a time to reflect not just on the economic
disintegration caused by the still ongoing global financial crisis, but to also
see the beginnings of new institutional frameworks rising from the rubble.
The implementation of the China-ASEAN (Association of Southeast Asian Nations)
free-trade pact, besides the obvious wins for both sides, will prove to be a
vehicle for a large
transformation of the currency landscape in East Asia, accelerating the
prevalence of the yuan as a regionally accepted currency alongside local
currencies and the US dollar.
No, the yuan is not about to be allowed to become freely exchangeable. So its
circulation will still have limitations. However, as China becomes the dominant
trade partner for the states of Central and Southeast Asia, the yuan will
easily become a main currency of commerce, despite a lack of formal
international frameworks.
China's trade with its Asian neighbors is growing at a blistering pace.
According to ASEAN statistics, total trade with China by ASEAN states in 2008
reached US$192 billion, just shy of overtaking its two largest trading
partners, Japan and the European Union. However, the close proximity of China,
bordering many of the 10 ASEAN nations, means that cross-border trades, often
transacted in cash, have brought large amounts of yuan into these nations where
they are even accepted in stores alongside local currencies for domestic
purchases.
A similar process is playing out in Mongolia, the Central Asian states, and
North Korea. Some countries such as Nepal and Cambodia have freely allowed
circulation of the yuan to improve commerce.
Hard statistics on the amount of yuan circulating abroad are difficult to come
by. No public statistics are kept by the central government and most numbers
are thus published by researchers using data from the border crossings where
yuan cash-in-transit has to be reported. In particular, the main routes of yuan
to Southeast Asia are through the borders of China's Yunnan and Guangxi
provinces; into Central Asia territories such as Kazakhstan and Kyrgyzstan via
Xinjiang; into Mongolia and Russia through Inner Mongolia or Heilongjiang; and
into North Korea through Jilin province.
The latest firm statistics are reported by Wang Liyuan in 2005 and Tao Shigui
of Nanjing Normal University in 2006. Comparing the estimated yuan cash in
circulation in neighboring countries from 2001 to 2004 shows some surprising
statistics.
In 2004, an estimated 21.6 billion yuan (US$3.2 billion at the present exchange
rate) circulated in bordering countries. By 2009, this was estimated to be over
30 billion yuan. Traditionally, the largest repositories for foreign yuan have
been the special administrative regions of Hong Kong and Macau. Together, in
2001, they held 45% of foreign circulating yuan. By 2004, this share had
dropped to only 23% at 5 billion yuan.
They were exceeded by Vietnam, where an estimated 6.4 billion yuan circulated
in 2004, 30% of the total. According to another article by Wang Rong, by 2006,
96% of all cross-border transactions at the Chinese border with Vietnam in
Guangxi province were transacted with yuan. The remaining 4% were transacted in
US dollars.
Myanmar, China's close ally, tied the total Hong Kong/Macau circulation amount,
having 5 billion yuan circulating within its borders. However, due to Myanmar's
lower gross domestic product and unstable currency, the yuan has become much
more important to daily transactions, especially in the north, and has become
known throughout the country as the "little dollar".
An even more striking case is North Korea. North Korea's yuan in circulation in
2004 was an estimated 2.75 billion yuan; it had by then grown over 900% from
only 300 million yuan in 2001. This rapid growth is tied to a burgeoning black
market in North Korea capitalizing on trade with China whose nexus is at
Changbai, a city on the northern shore of the Yalu River in Jilin province. The
relative international isolation of Myanmar and North Korea, combined with
their dependence on Chinese trade, makes the yuan circulation within these
countries much more important despite the lower overall numbers compared with
Hong Kong, Macau, or Vietnam.
Of the other countries bordering China, only Mongolia, Laos and Russia seem to
have substantial yuan, with 1.25 billion, 650 million and 500 million,
respectively. Together, the Central Asian countries could only account for
roughly 25 million circulating yuan, according to statistics. For countries not
bordering China, the numbers are more uncertain, with Thailand being estimated
to have 4.4 billion yuan in circulation, and the rest being uncertain.
The Chinese government is not standing by and taking a hands-off approach to
the spread of the yuan. Over the past year, China has completed currency swaps
worth 650 billion yuan with several countries and territories, including Hong
Kong, South Korea, Indonesia and Malaysia, and even as far off as Argentina and
Belarus.
The purpose of a currency swap is to exchange a large amount of the two
currencies of each nation at a fixed rate in order to allow trading partners to
have yuan on-hand for convertibility or foreign exchange reserves if necessary.
Since the yuan is not freely convertible otherwise, it is nearly impossible for
governments to aggregate large amounts of yuan at relatively stable market
rates.
In addition, the regionalization of the yuan is having some unintended help
from several nations that are experiencing severely high inflation, such as
Myanmar, or which have recently devalued, such as Vietnam and North Korea. The
loss of value of these currencies and the importance of Chinese suppliers to
local businesses will likely strengthen the hand of the yuan as a means of
regional exchange.
This regionalization is welcomed by China as a first step in making the yuan a
global currency. It will one day be followed by a free floating yuan, though
this will happen in accordance with a strategy of China's rising economic power
and interests rather than due to pressure from Western trading partners. Though
the yuan may not be a global currency for years, it is now an essential part of
the East Asian financial architecture.
Reginald Smith is at the Bouchet-Franklin Institute in Atlanta, USA.
(Copyright 2010, Reginald Smith)
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say. Please
click hereif you are interested in contributing.
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