The Internationalisation of the Renminbi Introduction Bernard Yeung NUS Business School 1
Panellists Prof. Eswar Prasad (US) Tolani Senior Professor of Trade Policy, Cornell University Dr. Cao Yuanzheng (China) Chief Economist, Bank of China Prof. Anthony Neoh, QC, SC, JP (Hong Kong) Dean's Visiting Professor, NUS Business School Mr. Ong Chong Tee (Singapore) Deputy Managing Director, Monetary Authority of Singapore 2
Prof. Eswar Prasad (US) Tolani Senior Professor of Trade Policy at Cornell University Brilliant academic, thought leader known for his insights in macroeconomics, development, and particularly Asia issues Senior Fellow at the Brookings Institution, the New Century Chair in International Economics Research Associate at the National Bureau of Economic Research Previously Chief of the Financial Studies Division in the IMF s Research Department and, earlier, the head of the IMF s China Division Degrees Ph.D., Economics, University of Chicago, 1992 M.A., Economics, Brown University, 1986 B.A., Economics, Mathematics, and Statistics, University of Madras, 1985 3
Dr. Cao Yuanzheng (China) Chief Economist, Bank of China Highly accomplished academic leader in the banking industry Held many senior positions in research and academia Executive director of SCRE Academy of Chinese Economic System Reform (now known as the State Commission for Economic System Restructuring) Deputy head and research fellow of the Research Institute of Chinese Economic System Reform Deputy General Secretary of the China Society of Macroeconomics Visiting Professor at the University of Southern California, Professor at Tsinghua University and Beijing University Degrees Post-doctoral qualifications in technical economics from Darmstadt University in Germany PhD Renmin University of China MA in economics from Wuhan University, and BA Xi an Foreign Language Institute 4
Prof. Anthony Neoh, QC, SC, JP (Hong Kong) Dean's Visiting Professor, NUS Business School Internationally-renowned expert in legal and financial history and regulations of financial markets and the financial services Invited by China s former Premier Zhu Rongji to be the Chief Advisor to the China Securities Regulatory Commission ("CSRC") [Sept 1998 to June 2004] A member of the International Advisory Board of the CSRC. Chairman of the Hong Kong Securities and Futures Commission from 1995 to 1998 Before his high profile public service, 13 years of HK Civil Service and then in private legal practice (HK and London) Visiting Professor from Practice at the Harvard Law School (September 2001 - May 2002) and visiting Scholar [1990/91] Degrees Law graduate of London University, (called to the English Bar in 1976). Appointed Queen's Counsel (now retitled Senior Counsel) in April 1990. 5
Mr. Ong Chong Tee (Singapore) Deputy Managing Director, Monetary Authority of Singapore Highly respected and admired Deputy MD in Singapore s MAS Oversees the central banking functions of Monetary Policy, Markets and Investments, as well as the Development functions. Markets and Investment Group is responsible for the management of foreign reserves, the implementation of monetary policy and the development of domestic government bond market Economic Policy Group undertakes economic research and analysis for MAS s monetary policy functions, as well as broader research relating to the Singapore and global economies Development Group oversees financial centre development. Mr. Ong joined MAS in 1986. He represented the MAS in New York between 1991 and 1994 6
Generic Issues in Internationalising a Currency 1. A currency for trade settlement 2. A denomination currency for investment, and 3. A currency for foreign exchange reserves Offshore centres, CNH market Dim Sum Bonds When it comes to China, questions become large in scale and complex 7
Let Us Contextualise Fast growth in China Stage one mid-90s to 3 rd quarter of the 2000s: Underemployed labour meets outsourcing Low currency value export driven growth USDCNY Exchange Rate Source: Bloomberg 8
The Ratio of China s Exports to GDP China Nominal GDP China Exports (annual) China Exports / China GDP All figures in USD billions Source: Bloomberg; World Bank; Customs General Administration PRC 9
China s Exports / World Exports Ratio Largest Exporter World Exports (annual) China Exports (annual) China Exports / World Exports All figures in USD billions Source: Bloomberg; IMF; Customs General Administration PRC 10
Let Us Contextualise Fast growth in China Stage two early 2000 to present: High savings and investment Government-directed big push Location-by-location, governments conduct growth tournament Governments have capitalised banks, state owned banks control financing, reformed SOEs occupy upstream and important industries» Effective big push economic engineering 11
State-Owned Banks China Banking Regulatory Commission (CBRC) State-controlled banks dominate. Number Asset (trillion yuan RMB) Policy Banks 3 56454 Source: People s Bank of China (Figures at the end of 2008) State-Owned Commercial Banks 4 291575 Joint-Stock Commercial Banks Others State as Largest Share Holder 11 101247 Others 2 13628 Urban Commercial Banks and Credit Union 158 42123 Rural Commercial Banks and Credit Union 5241 71436 Postal Savings Bank 1 22163 Foreign Banks 32 13448 Non-Bank Institutions 182 11802 Total 5634 623876 72.01% of total assets 12
How Big are SOEs? Although declining in numbers, SOEs play a pivotal role in China s economy. Number Assets Thousand Percentage Trillion Yuan Percentage State Owned Enterprises 156 3.15% 63.5 30.53% Domestic Funded Enterprises Collective Enterprises 260 5.24% 9.0 4.33% Other Joint-Stock Enterprises 638 12.86% 86.9 41.78% Private Enterprises 3596 72.50% 25.7 12.36% Other Types 124 2.50% 1.4 0.67% Foreign Funded Enterprise 186 3.75% 21.5 10.34% Total 4960 100.00% 3027 100.0% Sources: National Economic Census in 2008, China. 13
The scheme generates high savings, especially corporate savings and investment-driven growth 60 Investment (% of GDP) 50 40 30 20 10 0 China United States European Union Japan 14
China s GDP (Real and Nominal) China Real GDP China Nominal GDP All figures in USD billions Source: Bloomberg; World Bank 15
China s GDP / World GDP Ratio 2 nd Largest Economy World Nominal GDP China Nominal GDP China GDP / World GDP All figures in USD billions Source: Bloomberg; World Bank 16
Yuan-Dollar Appreciation The issue is not the value of the yuan it s not too low now WSJ Jan 30 - IMF Reviews China Currency's Value The IMF told the Group of 20 last week the yuan's value climbed faster last year.. accelerated to almost 20% in the last three months of the year. effective exchange rate. rose more than 8% in 2011 May 25: Renminbi.is no longer structurally undervalued and set to be more widely used for investment globally, argues a management trio at HSBC. 17
Yuan-Dollar Appreciation (Cont d) The concern is tight government control Control on capital flows and yuan value Capital market control 18
Internal and External Concerns Internally, the policies lead to: High reliance on exports High savings rate and current account surplus Low consumption and low labour income share High foreign exchange reserves, a very long exposure to the US dollar Limited monetary policy flexibility and yet high volatility in credit creation. 19
Internal and External Concerns (Cont d) Externally Distortions in China can have negative spillovers to the rest of the world Moreover, the world needs another credible global currency to complement the dollar, euro and yen. The size of China s economy high expectations on the yuan s role A more rational international payment regime (instead of relying on the dollar, weak euro and insignificant yen)? 20
Internal and External Concerns (Cont d) The internationalisation of the yuan links together China s own economic rationalisation Its international policy Global resource allocations, and The soundness of the global international payments system. China s central government is aware of: Non-sustainability of its current economic model The 12 th Five Year Plan states China wants a more rational market-driven economy Government has been plotting the internationalisation of the yuan 21
Internal and External Concerns (Cont d) Debates in China connect the currency issue with domestic capital market reforms, internal monetary stability, change in capital flows Freeing international capital flows capital outflows, lose grip of domestic capital market (rate and allocation) Freer exchange rate band more speculative flows and volatility 22
Panellists We have our expert panel assembled here to shed light on this complicated matter: Prof. Eswar Prasad (US) Tolani Senior Professor of Trade Policy, Cornell University Dr. Cao Yuanzheng (China) Chief Economist, Bank of China Prof. Anthony Neoh, QC, SC, JP (Hong Kong) Dean's Visiting Professor, NUS Business School Mr. Ong Chong Tee (Singapore) Deputy Managing Director, Monetary Authority of Singapore 23