Monthly Archives: November 2014

28th
Nov 2014

Western competition for Asian markets is heating up

President Obama used his recent trip to Asia to push through the Trans-Pacific Partnership (TPP), a massive trade agreement that includes twelve nations total, but excludes China. The TPP is the economic centerpiece of the U.S. rebalance to Asia, and China is responding to it by promoting the Regional Comprehensive Economic Partnership (RCEP), a mega-regional trade agreement that includes ASEAN, Japan, South Korea, India, Australia and New Zealand, but excludes the United States. Beijing is also pressing forward a free-trade agreement for the whole Asia-Pacific—the FTAAP—as a way to dilute the TPP and ensure that Beijing continues to get preferential access to some of its most important trading partners.

Yet, China is not the only one trying to create an alternative to the TPP. The European Union (EU) is pushing forward its own economic rebalance toward Asia—a move that challenges U.S. initiatives and provides Asian countries, including China, with more leverage over trade negotiations with the United States.

Source: www.debatingeurope.eu

Source: www.debatingeurope.eu

Europe’s economic presence in Asia is felt particularly in the areas of trade and monetary policy. For instance, Brussels is Beijing’s most important commercial partner—the two trade more than one billion euros a day. The EU is ASEAN’s third-largest trading partner, after China and Japan, but ahead of the United States. Overall, Asian markets are the destination for almost one third of EU exports and offer rapidly expanding market opportunities for European firms, which are also among the biggest contributors of FDIs in the region. In the case of ASEAN, Europe is by far the largest investor. EU companies have invested an average of 13.6 billion euros annually in the region in the last decade.

Following the surge of trade relations, Asia has become the largest buyer of euro-denominated assets. The share of euros in the foreign exchange portfolio of Asia’s major central banks’ accounts is, on average, for around 25-27 percent of the holdings of Asia’s major economies, reaching 30 percent and above in China (the world’s largest holder). This makes the euro the second-most-important reserve currency in Asia—after the dollar, but ahead of the yen.

Europe’s economic rebalance toward Asia is rooted—as in the case of the United States—in the realization that Asia has become central to global prosperity and to the Western powers’ own growth prospects. Since 2011, the EU has signed free-trade agreements with South Korea and Singapore; it is negotiating one with Japan, Vietnam, Malaysia and Thailand; and has opened discussion on a trade and investment agreement with the whole of ASEAN.

China and the EU are currently negotiating a bilateral investment treaty that, if successful, could pave the way for a bilateral free-trade agreement. At the last summit of the Asia-Europe Meeting (ASEM)—an inter-regional dialogue forum between European and Asian leaders—held in Milan in October, Matteo Renzi, Italy’s prime minister, expressed support for the opening of negotiations on an FTA with China. While some European leaders such as David Cameron, the British prime minister, have already declared their support for an EU-China FTA, the position of Italy—currently holding the presidency of the EU Council—is somehow surprising, given that the country’s small and medium enterprises have been particularly hit by Chinese competition in the last decade. Yet, sluggish growth in many Eurozone countries and growing Chinese investments in Europe are playing in favor of an early adoption of an EU-China deal.

The EU does not have troops or binding military alliances in Asia, making it easier for Brussels to engage the region without the security and strategic considerations that beleaguer the United States. While politically the EU’s presence in Asia is broadly complementary to that of the United States, economically the transatlantic allies are competitors. As Western competition for Asian markets is heating up, companies should devote the right amount of time and resources to understand the implications of these dynamics for their business.

A longer version of this article was originally published in The National Interest.

07th
Nov 2014

Europe to benefit from the internationalization of the Chinese currency

China is stepping up preparation for the internationalization of its currency and Europe is likely to benefit from it. Last year the Chinese government launched the Shanghai free-trade zone (FTZ), setting the country off with an ambitious plan for economic and financial reforms. If successful after the three-year test period – which will end in October 2016 – the FTZ could pave the way to the convertibility of the renminbi (or yuan), thus creating an alternative reserve currency to the dollar.

Today, the renminbi is the world’s second most used trade finance currency. The immediate goal for Beijing is to make it the main currency for trade in Asia and place limits on the role of the dollar in the international monetary system. More than 50 Central Banks have so far added the Chinese currency to their portfolios as growing trade ties and a growing number of reforms by Beijing are leading reserve managers to view the renminbi as a viable reserve currency. For instance, at the beginning of October the United Kingdom raised 3 billion yuan via a landmark offshore sovereign yuan bond and kept the yuan proceeds into its foreign exchange reserves rather than converting them into dollars or euros. Moreover, Australia publicly acknowledged a few weeks ago that it has allocated 3% of its foreign exchange reserves to renminbi. The increase of the renminbi in the foreign reserves is often done at the expense of the dollar.

Chinese currency: 100 Yuan (or Renminbi)

Chinese currency: 100 Yuan (or Renminbi)

Since the onset of the global economic crisis, Chinese officials have maintained that the US is abusing its position as controller of the main reserve currency by pursuing irresponsible economic policies. In March 2009, Zhou Xiaochuan, the People’s Bank of China (PBOC) governor, explicitly called for the creation of a new international reserve currency. An op-ed by Xinhua news agency on 22 October 2013 did not hesitate to call for a ‘de-Americanized’ world. Besides official declarations, China has also taken concrete action: since 2009, the PBOC has signed currency swaps agreements with numerous Central Banks around the world.

As China is stepping up preparation for the internationalization of its currency, Europe is seen as playing a crucial part. While the dollar still accounts for more than 60% of global – and around 55% of Chinese – reserves, the euro provides China with a formidable alternative. Today, euro-denominated assets represent around one-third of Beijing’s total foreign currency reserves (which, at US$4.2 trillion, are the world’s largest). This means that Beijing has bought around one and a half trillion euros. In October last year, the PBOC and the European Central Bank (ECB) signed a bilateral currency swap agreement for a sum of €45billion (RMB350 billion), the largest ever signed by Beijing outside the region. This October, the ECB decided to add the Chinese yuan to its foreign-currency reserves.

Today, the EU is China’s first trading partner; the two sides trade more than one billion a day. Europe is also one of the primary destinations of Chinese overseas investments and the Eurozone is now one of the major beneficiaries of Beijing’s divesting its foreign reserves away from the dollar. The internationalization of the Chinese currency is therefore likely to be a boon for Europe.