China Will Need to Show a Steady Hand in Its Currency Moves
How are China's plans for solidifying its place as one of the world's economic power?
This effort depends partly on the renminbi being approved as one of the world's major reserve currencies.
Everything seemed to be going well with respect to the Chinese currency with the International Monetary Fund last December taking initial steps in making it a reserve currency. The IMF made the renminbi one of five currencies with Special Drawing Right status. The SDR is a reserve asset that supplements the member countries' reserves. The IMF bases its choices on the global importance of currencies. Issuing countries must be among the world's largest exporters, and their currencies must be "freely usable," meaning that according to the IMF, "it is widely used to make payments for international transactions and widely traded in the principal exchange markets."
The SDR is made up of the U.S. dollar, the Japanese yen, the euro and the British pound. China's inclusion in the SDR was the first change in 15 years. The IMF reviews the SDR every five years.
However, over the past year or so, the Chinese currency has not fared well. Last August, it took 6.2100 renminbi to acquire one dollar.
Now it takes about 6.7000 renminbi to purchase a dollar.
This depreciation of the currency has had an impact. The renminbi dropped to sixth place in the world in terms of cross-border payments in the first six months of the year, according to data from the Society for Worldwide Interbank Financial Transactions (AWIFT).
The fall stemmed from recent depreciation of the currency that impacted investor willingness to use the renminbi in cross-border transactions.
The top four currencies used in cross-border payments were the dollar, the pound, the euro, and yen.
Canada slipped into the fifth position for the first six months of this year.
The Chinese currency reached its peak in activity in August 2015 as it recorded a cross-border payments share of 2.79%. This share has dropped to 1.72% in the first half of this year.
China has come under criticism for depreciating its currency. Officials have given mixed signals since that time about exactly what the Chinese policy on its currency might be.
Some analysts have argued that the Chinese are worried about China's rate of growth China, and hence, want to see a weaker renminbi so that exports will be stimulated.
Yet, the Chinese central bank has put out in excess of $470 billion of its foreign exchange reserves to curb the depreciation.
Furthermore, in absolute terms the use of the renminbi grew by 0.2% from May to June in value terms. However, payments in all currencies increased by 10.3%.
One other factor that impacts the use of the renminbi is that Chinese interest rates have fallen. That has led some exporters who formerly borrowed from abroad to borrow renminbi.
As the Chinese participate increasingly in global markets and are faced with market movements that they can't control, they will have to adjust to marketplace vagaries. Chinese officials are just learning how to operate in such markets.
The continued decline in the value of the renminbi is troublesome, especially given China's desire to move the renminbi into reserve currency status.
It is hard to see the Chinese changing directions. They still want to be a major player in global markets and a well-used currency is a prerequisite for that.
Investors and businesses involved in international trade will want to learn when the depreciation of the currency is going to end. They will want to learn how Chinese officials are going to operate in amid uncertain global markets.
China will want to show a steady course.
Coherence and consistency are vital parts of stable markets and trading patterns.