The old German siren bowled over by the young Yuan


The future will tell if it is true love or just a gig to remember an old cinematic glory. Meanwhile, however, the signs of falling in love are all there.

During his visit to Germany a month ago Chinese Premier Li Keqiang said, literally, that “Germany and China would be a dream couple”, referring of course to their commercial potential and strong bilateral relations.

Simplifying, we can say that China is the best business partner of Germany in Asia and Germany the best partner of China in Europe.

What do you weigh this “affinity” has been able to understand the recent controversy over the duties that the EU wanted to impose on Chinese manufacturers of solar panels, which has seen its fierce opposition of Germany. In fact, at the time of his visit, the Chinese premier went to Berlin, not Brussels.

The similarities do not end here. Both countries have based on exports, and thus on the competitiveness conquered by wage deflation , their economic success.

With one difference though. While Germany is managing very well in the international context, and in the eurozone in particular , China for now, only pay the bill .

The question is not trivial and has to do with what may be called the financial game (and therefore political) crucial for the next decade: the full convertibility of the Chinese currency. One issue that is directly linked with the future of the international monetary system and therefore the dollar.

In Beijing are well aware, so much so that the government has made it clear that he is willing to speed up a process that analysts recommend to last another several years.

Meanwhile every year the Chinese will lose money on the side of the income of their balance of payments mainly because of the relationship, still too tight, that binds the Chinese economy to the dollar. And according to the Financial Times the government would have decided to “relax considerably” their capital controls, step preparatory to full convertibility.

A road complex, but the Chinese are not alone. On the process of internalization of the renminbi waking an old and powerful lady, Frau Bundesbank.

A few days ago in Frankfurt was held at the Chamber of Commerce just a conference entitled “The internationalization of the renminbi” and one of the speakers was Joachim Nagel, a member of the board of Buba. It’s worth reading his report because it is almost an act of love of the old German lady at the still young but promising yuan.

Nagel begins by outlining the extraordinary progress made by China since 2001, after joining the WTO. A success so overwhelming that led the Chinese to overcome the Germans in their role as primary exporters. With its current account surplus, view our banker, China has accumulated 3.4 trillion of reserves, but most of all has become an attractive partner for foreign companies, which want to invest in China and, above all, in its own currency.

And therein lies the point. A survey conducted among the managers who manage the reserves, reveals that 14% of those who responded have confessed to have invested in renminbi and another 37% plan to do so within the next ten years. In a context in which attention to the non-traditional reserve currencies (dollar, euro, yen and pound) increases, this figure can hardly go unnoticed.

But what is most striking is the similarity between what is happening now in the yuan and what happened to the German mark after 1950. “Germany – remember – experienced a great economic success which enabled her to accumulate a large volume of foreign exchange reserves, which gave to Mark the status of a reserve currency. The renminbi is certain that will have a similar long-term perspective if access to the financial market will be liberalized. ”

The old lady recognizes her features in the Asian nephew.

The steps, however, are complex. Now the Chinese government aims to promote direct investment in renminbi, supporting domestic banks to issue yuan-denominated debt abroad. This certainly would benefit from the income of the balance of payments. But still remember, “the use of a foreign currency depends on several factors.” Not only those macroeconomic, then size of the economy and trade flows”, but mainly need “investor’s confidence in the monetary and fiscal policy of the country, as well as its legal context.” And on that Germany could not help a bit, building on its international prestige.

This first step coincides with the second step of the long journey that a currency must do before becoming a reserve currency.

The first step, that China is already walking, is that the currency is used to trade. It is estimated that 0.69% of international transactions to be settled in yuan. The grandson is still in its infancy, but it will do.

The second step is what explained before, namely to ensure that the yuan becomes a currency to denominate investments.

The third step, is one in which the currency becomes a reserve currency.

Here, too, the story draws a clear parallel between what happened in Germany and what might happen in China, however, in the wake of what happened in Japan after 1980, when the government decided to internationalize the yen.

The new mark was created in 1948 and like all currencies at the time of Bretton Woods was pegged to the dollar. From there to the mark was the success story we know.

The yuan was pegged to the dollar in 1994 and thanks to this decision, “China has strengthened its growth strategy based on exports.” In 2005, the Chinese central bank has abandoned the peg to the dollar and the yuan pegged to a basket of currencies. This in spite of Chinese exports has continued to grow even more expanding the reserves of Beijing.

The end of the anchor to the dollar, however, does not mean that China has stopped using American currency. At the moment the dollar is the currency that the Chinese use for their international transactions ( paying a substantial seigniorage to the U.S. ), even though transactions in renminbi, from 2010 to 2012, increased from 0 to 12%, thanks to the opening of a off shore center in Hong Kong, which currently houses about 670 billion yuan in deposits.

“At the moment then – he explains – China certainly has completed the first step, which has become a currency for trade, but because of capital controls is still in transition to the second step, namely that of the currency of investment.” And it is the capital controls that Beijing now wants to break down in order not to be limited to work on off shore.

Once captured this historic step, “China will be able to assert its currency in international and domestic financial protect its gaming at the same time, as long as the government does not judge that we can proceed to a final liberalization.”

In this revolution is to do good business, concludes our banker. “Frankfurt – he explains – is trying to establish itself as the European trading center of the renminbi and the Bundesbank welcomes these initiatives, which go in the right direction”.

He concludes: “The high level of interaction between the real economy of China and Germany highlight the need to trade in renminbi, also using Germany as a hub.”

It will also be aged, and maybe even enchanted by the success of young Yuan.

But Germany is always a siren

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