By Anjan Roy
China is riding the crest of its economic success currently. It has taken one more step to make its currency globally traded and thus acceptable. China has announced what is known as the Hong Kong-Shanghai Stocks Connect from November 17. This in effect means off shore trading in the Chinese currency for purchase of stocks in Hong Kong and Shanghai exchanges.
Earlier, there was a limit on daily conversion of 20,000 yuan for the residents of Hong Kong. Now the limit has been taken off and they can trade unlimited amounts for purchase of stocks in Shanghai. The banks who participate in these transactions would square off their purchase and sale of the Chinese currency in offshore markets and not on Chinese onshore markets.
Hong Kong will thus emerge as a major centre for trading in yuan. This will make it more acceptable for use by others for conducting their international trade – a move to make the Chinese currency more global. Eventually, China visualises that the yuan should become a reserve currency just as the dollar or the euro or yen are.
China has been taking very measured steps to launch its ambition of making yuan a reserve currency. Ten years back, Hong Kong banks were allowed to accept deposits in the Chinese currency. The small beginning in 2004 started swelling and currently yuan deposits in Hong Kong banks are reported to be as large as close to a billion yuan –which is the largest pool of yuan savings outside of mainland China.
The other step taken by the authorities was to start encouraging banks to clear yuan deals at various business centres. China has reportedly appointed clearing banks in London, Paris, Frankfurt as well as in Doha and Singapore. China had also offered its yuan lines of credit and currency swap facilities to various countries in the region for their global trades in the wake of large scale volatility in currencies following the Federal Reserve’s announcement of withdrawal of its bond purchase programme in 2011.
But a nation’s currency could be as best as its economy. Acceptability of a currency increases as its share in global trade rises and the size of its economy grows. China’s exports to the US alone is as large as $520 billion this year. It has a treasure chest of foreign exchange reserves of over $4 trillion and the country is slated to import from the rest of the world to the tune of a humongous $10 trillion in the next five years. Chinese economic muscles were furtively put on show this week.
Chinese president Xi Jinping stole the show this week while hosting the Asia Pacific Economic Co-operation Summit in Beijing. China is promising to invest outside the country over $1.5 trillion, some 500 million Chinese would travel outside the country in the next ten years and China would spend $40 billion in improving the traditional Silk Route of trade between Asia and Europe. There are numerous other benefits he is promising, including setting up a large bank – the Asia Infrastructure Investment Bank (AIIB) – to fund infrastructure projects across Asia. The bank will in effect dwarf the Asian Development Bank and eventually the World Bank, which are dominated by Japan and the USA respectively.
The large coffers for funding infrastructure has really set off clamours for Chinese money. The sheer size of the funds offered by China is dwarfing the World Bank and the Asian Development Bank. Infrastructure is a vital need for many, particularly in developing Africa and parts of Asia. These deals are pushing China far.
Elsewhere in the country, China is holding its air show to project its technological capabilities. It has unveiled its latest fighter aircraft at the show, meant particularly for the US military. Its jet fighter, described to fifth generation in its technology and thrust, is claimed to be very close to the US F36. This has of course immediately given rise to a debate that Chinese cyber spying into the computer networks of US vendors, in particular, Lockheed Martin, has given it vital design details. The Chinese jet fighter is thus being claimed to be a king of a copy of US F36.
Even if the Chinese had stolen designs from the US aircraft makers, actual production of sophisticated jet fighters indicate the extent of development of high-tech industries in that country. The country is getting into production of commercial aircraft as well, which were on offer at its air show. A number of deals were reportedly struck for commercial aircraft, an area which was completely dominated by the US and select European countries.
Compared to China, despite its huge lead in high-technology and sheer power from its nuclear arsenal, Russia is languishing. Russia had come to the APEC meet in Beijing, but almost for getting some support from the Chinese for selling its gas and oil, as well as to build pipelines across to Chinese buyers. Russian economy is almost tottering because of its abject dependence on oil and gas revenues. With the prices falling, Russian finances have been hit hard. Being bereft of its erstwhile manufacturing industries, Russia is also dependent on imports of a variety of items which further exposes its weakness.
There are lessons for India. Economic development is essential to gain traction in global affairs. Geo-economics drives geo-politics in twenty-first century. (IPA Service)
