Category Archives: Euro

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.

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

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.



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.