Category Archives: Dollar

11th
Nov 2017

Why we are entering a new era in China-Europe relations

US President Donald Trump’s ‘America first’ announcements and policies are alienating his Western allies. This coincides with the United Kingdom beginning its departure from the EU, now set for 29 March 2019 at 23:00. In these circumstances, China has been quietly reaching out to Western nations. Both Beijing and Brussels hope to move ahead with economic globalization, and during the annual EU-China Summit held in Brussels on June 1–2, 2017, the two sides forged a new green alliance to combat global warming, a clear nose thumbing at Trump. With the EU and the United States increasingly divided, this moment may mark the beginning of a new China-EU axis in global politics.

One of the areas in which China and the EU have developed strong ties is in the monetary field. Beijing has traditionally supported the euro, which is the only serious alternative to the dollar, and has diversified its foreign exchange reserves—the world’s largest—so that it now holds over one-third in euros and just slightly more than half in dollars, a decrease of around 30 percent since 1999, when the European common currency came into circulation. What this means is that in the last several years, Beijing has swapped dollars for euros, a trend that is likely to continue in future.

China’s diversification strategy signals that the dollar is no longer the world’s only reserve currency, and this is important to Beijing, which is trying to internationalize its currency as it weans itself off of its dependency on the United States’ economic cycle and monetary policy. Europe has, in turn, supported many of China’s monetary ambitions. The Europeans unanimously backed the decision by the International Monetary Fund (IMF) in December 2015 to include the renminbi in the basket of currencies making up the Special Drawing Right (SDR), an international reserve currency that includes the U.S. dollar, the euro, the British pound, and the Japanese yen. The decision was clearly political. The EU wanted to send a friendly message to China, the world’s second-largest economy, as well as to recognize what Beijing had done to support the euro during the euro crisis of 2009–11, when the European common currency became the target of speculative attacks mainly stemming from Wall Street–based banks and hedge funds. At the time, Chinese leaders intervened on various occasions to reassure the financial markets by buying eurozone bonds.

Today, the old continent is home to the largest number of renminbi bank clearings or offshore hubs where the Chinese currency can be traded. The fact that offshore renminbi hubs have also emerged in Budapest, Frankfurt, Luxembourg City, Madrid, Milan, Paris, and Prague indicates Europe’s willingness to promote the use of the Chinese currency. In the same vein, most of Europe’s central banks have accepted—or are considering accepting—China’s currency as a viable reserve. Although London is currently the most important offshore market for renminbi trading, once the United Kingdom leaves EU, significant shares of renminbi trading in London will most likely move to the continent, in places such as Paris, Frankfurt, and Luxembourg, thus strengthening the China-EU monetary axis even more.

When it comes to trade, relations between China and the EU are more rocky, although Trump’s derision of global trade certainly provides an opening. Between 2002 and 2016, total EU-China trade has risen dramatically, from 125 billion euros to roughly 515 billion euros. Today, China and the EU trade more than 1.5 billion euros in goods each day, and total bilateral trade in 2016 was 514.6 billion euros according to the European Commission—nearly equivalent to what China exchanges with the United States. In fact, the EU is now China’s most important trading partner, although China ranks number two for the EU, after the United States.

In addition to buoyant commercial relations, Beijing is trying to charm Europe through investments. Europe is now the top destination for Chinese foreign investments, surpassing the United States. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, China invested nearly $164 billion in Europe between 2005 and 2016. During that same period, it invested $103 billion in the United States.

These dynamics indicate that Europe-China relations are entering a new phase. Make no mistake, however. A China-EU alliance would be more a marriage of convenience than a solid partnership—one that is facilitated by Brexit and that revolves around a shared antagonism for Trump. We must wait and see whether the new dynamics within both the United Kingdom and the United States transform this axis into a more permanent one as new possibilities for China-EU relations open up, unthinkable only a few years ago.

An earlier and expanded version of this article was published in Foreign Affairs.

14th
May 2016

Chinese firms investment spree favours Europe over America

Chinese companies made record bids for foreign acquisitions in the first quarter of 2016, focusing especially on agriculture, manufacturing and tourism. But while such investments have been met with open arms in Europe, regulatory resistance is stiff in the United States. With Chinese firms eager to gain Western technology, brands and customer bases, the European Union is likely to benefit.

Chinese investment abroad was almost nonexistent. Today, China is one of the world’s top three sources of foreign investment. According to financial data provider Dealogic, Chinese firms put up some $102 billion to buy foreign companies between the beginning of the year and mid-March 2016. This includes the mega-bids for Swiss agrochemical firm Syngenta by China National Chemical Corporation (ChemChina) and for Starwood Hotels & Resorts by a consortium led by Chinese insurer Anbang. Anbang’s $13 billion bid ultimately failed, but the numbers are still eye-popping. For comparison, Chinese companies spent $106 billion overseas throughout the whole of 2015.

The value of Chinese firms’ offshore assets is set to triple from about $6.4 trillion in 2015 to nearly $20 trillion by 2020, according to a joint report by the Rhodium Group, a research company, and the Mercator Institute for China Studies. A growing share of these offshore assets will be in Western countries. China’s global stock of investment abroad, which includes corporate mergers, acquisitions and spending on start-ups, is expected to grow from $744 billion to $2 trillion by 2020. There is plenty of room to grow. Today China’s stock of outbound investment represents only about 7 percent of gross domestic product. In Germany, the proportion is 47 percent, in the US it is 38 percent and in Japan it is 20 percent.

Chinese companies undertake cross-border deals for many reasons, including access to resources, expertise, technology and brands, as well as to move up the value chain. A classic example is Lenovo’s acquisition of IBM’s personal computer business, which allowed the Chinese firm to gain global distribution, operational expertise and brand value. Chinese companies are increasingly eager to learn from their global competitors and absorb best practices in areas such as risk management, quality control and information technology.

Chinese firms

After having relied on investment from other countries for years, China has begun encouraging domestic companies to invest and operate overseas. This is all the more important for the Chinese firms saddled with debt, overcapacity and losses – the so-called “zombie companies” – many of them SOEs. Their situation is partly the result of huge investments Chinese authorities required them to make to stimulate the economy after the 2008 global financial crisis crimped international demand. Acquisitions abroad address these problems by offering a better return on capital – which is declining inside China – and by allowing firms to offload some of their debt onto newly purchased companies. The People’s Bank of China (PBOC) has designed loan schemes to support companies that invest overseas.

There is, however, risk of a backlash from regulators, especially in the US, where the Committee on Foreign Investment could block deals – such as the recent Syngenta mega-bid – if it is deemed to endanger the country’s food supply, and thereby its national security. In February, Fairchild Semiconductor International rejected a $2.5 billion takeover offer from a Chinese-led group, opting instead for a smaller offer from an American rival. The company cited concerns that US regulators could block the deal with the Chinese. The unsuccessful offer was one of at least 10 failed Chinese bids in the last year, according to the New York Times.

The winner in the battle between American regulators and Beijing-backed companies will be Europe, which has clearly become the preferred destination for Chinese investors. According to the China Global Investment Tracker, a joint project of the American Enterprise Institute and the Heritage Foundation, between 2005 and 2016, China invested nearly $164 billion in Europe (including non-European Union countries). During the same period, it invested $103 billion in the U.S.

The Rhodium Group found that between 2000 and 2014, Chinese companies spent 46 billion euros ($52 billion) on 1,047 direct investments (greenfield projects and acquisitions) in the EU-28 countries, with the vast majority of the transactions coming after 2009. The United Kingdom received the biggest share of that amount, with a total of 12.2 billion euros ($13.8 billion), followed by Germany with 6.9 billion euros ($7.8 billion) and France with 5.9 billion euros ($6.7 billion). In 2015, however, ChemChina’s acquisition of Pirelli put Italy in the top position.

Chinese companies show no sign of slowing their investment push. More big deals can be expected in coming years. If the American politicians and regulators continue their stiff resistance to Chinese investment, Europe will see even more money flowing in.

An earlier and expanded version of this article was published by the: austriancenter.

14th
Apr 2016

Europe bats its lashes for the Chinese currency

The central parity rate of the Chinese currency has weakened in recent weeks against the world’s major currencies. HSBC currency analysts suggest further depreciation of the currency against the US dollar by the end of the year. However, this has not prevented the West – and Europe in particular – from doubling down on the currency.

Behind Europe’s investment in the renminbi there is a clear strategy of support for the Chinese currency. When the International Monetary Fund announced in December that the renminbi would join the US dollar, the British pound, the euro, and the Japanese yen in the currency basket underlying its unit of account, the Special Drawing Rights (SDR) basket, the decision was clearly political.

Even though the currency performs well and its internationalization is sustaining, its inclusion in the SDR owes much to the decision by the US to defer to Europe. The US had in fact argued for years that the renminbi should be included in the SDR only if China opened its capital account, let its currency float freely, and had a more independent central bank. None of this has happened. But after China established the Asian Infrastructure Investment Bank with the support of Europe, the US agreed to drop its objections. After all, the SDR basket plays a minor role in global finance, and admitting the renminbi was seen as a small price to pay to keep China embedded in the Bretton Woods institutions.

renminbi stash

The currency’s inclusion in the SDR, it is hoped, will encourage China to liberalize its capital account further. Europe would also like to welcome the country to the core group of world powers that decide global monetary affairs. British Chancellor George Osborne has made it clear that he would like the City of London to be the most important offshore market for renminbi trading and services. It was no coincidence that during President Xi Jinping’s state visit to the United Kingdom in October 2015, China chose London to issue its first overseas renminbi sovereign debt.

The rest of Europe is equally enthusiastic. Today, the continent is home to the largest number of renminbi bank clearings. Offshore renminbi hubs have emerged in Frankfurt, Paris, Milan, Luxemburg, Prague, and Zurich, and most of Europe’s central banks have added – or are considering adding – China’s currency to their portfolios. Europe’s efforts could succeed; but unless China makes its currency even more widely accessible and opens its market further, they are almost sure to fail.

An earlier version of this article was published in project syndicate

14th
Mar 2015

China and Europe boost monetary connections

Europe’s four-largest economies – Germany, France, the United Kingdom and Italy – have decided to join the Asian Infrastructure Investment Bank (AIIB), a China-led regional bank designed to finance infrastructure projects in areas such as energy, transportation and communication in Asia. China is set to provide up to 50% of the bank’s $50 billion initial capital. Initiated in October 2014, the AIIB is seen as a potential rival to the US-based World Bank and this partly explains why Washington put pressure on the European allies to stay out from the China-led bank.

Yet, the US appears to have overlooked the extent of the monetary connections established between Europe and China in recent times. The two have, in fact, boosted monetary relations through currency-swap agreements, yuan bank clearing, and support for each other’s currency – the euro and the renminbi.

Today, the renminbi is the world’s second most used trade finance currency and the seventh-ranked global payments currency. The People’s Bank of China (PBOC) has in the past few years signed bilateral currency swap agreements worth more than 3 trillion yuan ($480 billion) with 28 central banks and monetary authorities.

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 it as a viable reserve currency. Most of Europe’s major central banks have added – or are considering adding – the Chinese currency to their portfolio, often at the expense of the dollar. In October 2014, for instance, the United Kingdom raised 3 billion yuan via a landmark offshore sovereign yuan bond and kept the proceeds into its foreign exchange reserves rather than converting them into dollars.

In October 2013, 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. In November 2014, the ECB decided to add the Chinese yuan to its foreign-currency reserves.

Source: www.leaprate.com

Source: www.leaprate.com

The PBOC has also designated a number of yuan clearing banks, known as RMB Qualified Foreign Institutional Investor (RQFII). Half of these ‘renminbi hubs’ are in Europe, in places like London, Frankfurt, Paris, Luxemburg and Prague. In January 2015, China’s and Switzerland’s central banks signed a RQFII agreement, making Zurich the newest hub for renminbi trading.

China’s ultimate goal is to make the yuan one of the main currencies for global trade and to place limits on the role of the dollar in the international monetary system. Since 2008, Chinese officials and scholars have maintained that the US is abusing its position as controller of the main reserve currency by pursuing irresponsible economic policies. An op-ed by Xinhua agency on 13 October 2013 did not hesitate to call for a ‘de-Americanized’ world.

The euro is seen in Beijing as a counterbalance to the dollar and instrumental for creating a multipolar currency order where the renminbi would also have its place. Consequently, China has divested away from the dollar in recent years and into the euro. Today, euro-denominated assets represent around one-third of China’s total foreign currency reserves which, at more than US$4 trillion, are the world’s largest.

Eurozone governments and institutions have actively courted Chinese purchases of euro-denominated assets. Since its establishment in May 2010, the European Financial Stability Facility (EFSF) – replaced in October 2012 by the European Stability Mechanism (ESM) – has actively sought Beijing’s support, obtaining concrete pledges for the purchase of Portuguese, Irish and Greek bailout bonds auctioned by the EFSF/ESM €440 billion rescue fund.

Monetary relations between China and Europe are expected to intensify in the future, challenging the dominant position of the dollar. If the issue is not handled with attention, there is risk of a serious transatlantic rift.

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.