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| Currency conundrum |
| Martin Hutchinson / Jun 06, 2009, 00:53 IST |
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China/Malaysia: Is China’s currency about to become a pillar of international trade? In Asia, at least, that appears to be the trend. Malaysian Prime Minister Najib Abdul Razak said Malaysia may follow Brazil in denominating more Chinese trade in renminbi.
The symbolism pleases Beijing and diversifying foreign currency holdings out of dollars makes sense for many countries. But the over-controlled renminbi is a less suitable mechanism for regional trade than, say, the free-market yen.
Given recent US money creation and Washington’s looming budget deficits, it makes sense for third parties to denominate their trade in local currencies, as Razak has indicated.
China, as the leading exporter in Asia, should expect a substantial fraction of its trade to become denominated in renminbi, particularly as its Asian neighbours are home to many companies whose operations are tightly linked into China-centred supply chains.
However, the renminbi has substantial disadvantages as a store of value. It is tightly controlled by the People’s Bank of China and Chinese individuals still cannot buy foreign currencies. There is thus a large potential overhang of renminbi supply, which could destabilise the currency. Non-Chinese reserve holders will probably not choose to hold much of their assets in a currency whose value may be overstated.
The Americas have the dollar, and Europe has the euro, but Asia lacks a single dominant currency. Whereas the yen played such a role in the 1980s, slow Japanese growth, excessively low yen interest rates and the increasing importance of China in world trade have made it a less attractive reserve asset.
Even so, the Japanese economy remains larger China’s. While it exports less than its neighbour, the value of goods Japan ships overseas may be greater, since many Chinese exports are low-cost assemblies of parts manufactured in other countries. A return to growth in Japan and higher yen interest rates could revive the yen’s global importance.
Global trading and reserve patterns may well move towards a more balanced currency portfolio. For Asians and those trading heavily with China, the renminbi will be part of that portfolio. But while it may have a growing role, there’s little reason to expect it will displace the yen.
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