It says a lot about the giddiness surrounding China’s economy that Communist state media, international investors and Canada’s westernmost premier have all taken to hailing the ascendency of China’s currency in such ebullient terms, it’s impossible to tell who’s talking.
Here’s Beijing propaganda organ Xinhua the other day: “The globalization of the yuan, or renminbi, will not only benefit the Chinese economy, but generate global economic stability.” A survey of institutional investors earlier this year by Boston-based State Street found more than half believe that “as China’s economic influence grows, the global importance of the renminbi will become magnified,” eventually surpassing the U.S. greenback as the world’s primary reserve currency. Then, earlier this week, B.C. Premier Christy Clark met with Chinese business leaders to make her pitch for Vancouver to become North America’s first offshore hub for trading China’s currency. Asia, she said, “is now . . . the centre of the world.”
So to say there’s hype over China’s currency, variously referred to as the yuan or renminbi but also as the “redback,” would be an understatement. For years, China has campaigned to boost the importance of the yuan as a global currency, to establish it as a buffer against swings in the U.S. dollar. Then, last month, China and the U.K. agreed to set up a trading hub in London to allow the direct exchange of yuan for British pounds, bypassing the U.S. dollar, and making it cheaper and easier to settle yuan-denominated transactions. Where the yuan flows, it’s expected, increased trade will follow.
Which is why other ﬁnancial centres, including Vancouver, Toronto and San Francisco, are clamouring to establish a similar offshore trading hub on this side of the pond. Clark told reporters she hopes Chinese officials will make a decision within a year. Whether the trading hub is confined to Vancouver or Toronto, or exists as some combination of both cities, it would no doubt go a long way to boosting trade with the country of 1.3 billion people and lessening Canada’s reliance on trade with the U.S.
Yet, as the race for a piece of China’s currency action unfolds, it would be foolish to overlook an equally important trend. Wealthy Chinese are desperate to get their money out of the place. Anyone living in Vancouver doesn’t need to be told this, of course. Stratospheric real estate prices have benefited, in no small part, from the influx of rich mainland Chinese who have been flocking to buy properties there, and in other Western cities, as a safe, stable store of wealth.
Buying homes overseas is only one of the ways China’s elite have skirted Beijing’s currency controls, meant to prevent individuals from moving more than US$50,000 a year out of the country. Last week, another path for yuan to flee China was exposed. In a report that’s sent shockwaves across the country’s financial sector, China Central Television reported that rich Chinese have transferred billions of dollars’ worth of currency out of the country through a secretive remittance program sanctioned by Beijing and available through several large banks. CCTV accused one lender, in particular, the Bank of China, of using the program to help clients launder money. The program has since been halted, following an investigation by China’s central bank.
Again, it bears asking: If China is the future of the global economy, why are rich Chinese so averse to keeping their money there?
Three possible answers keep coming up. The most innocuous is simply that Chinese investors are dissatisfied with the rates of return available in their country. The Shanghai Composite Index remains stuck where it was in late 2012, and is still a whopping 65 per cent below the peak it reached before the global financial crisis. At the same time, Chinese property prices make Vancouver look downright affordable (if you happen to have a seven-figure bank account, that is).
It’s also likely that a number of those Chinese eager to liberate their loot from the Middle Kingdom do so because they accumulated it by corrupt means. President Xi Jinping has vowed to fight corruption by officials at all levels, from “tigers” to “flies.”
Of greater concern to the West, however, is the most likely reason China’s elite want to get their cash out: They know a swath of the country’s stellar economic growth has been a mirage, fuelled by debt and wasteful investment. Michael Pettis, an economist, professor of finance and blogger who lives in China, has argued that, barring a massive transfer of wealth from the state to households, something the Communist party is loath to do, the only way to achieve GDP growth above three to four per cent is a further increase in unsustainable debt. The fear is that a debt crisis will shake China’s economy and seriously undermine faith in its currency.
That sentiment stands in stark contrast to the West’s exuberance over China. It’s worth keeping that in mind before we get too carried away by the hype.