Welcome to the 168th edition of Trade War.
Following the recent Washington debt ceiling impasse is Beijing ready to push for a more international Chinese currency? This author argues that an unwillingness to loosen control over the capital account makes that goal unachievable. And a top Russian banker says China’s yuan has momentum towards unseating the US dollar and warns of the danger of a global “hot war.”
While much of the world is dealing with rising prices, Beijing is trying to overcome the opposite problem, or deflation. China’s economy is struggling with long term structural challenges inhibiting the hoped for growth in consumption, says a prominent Chinese economist. Regional banks in China to face LGFV debt reckoning. And Beijing lacks the political will to take steps to overcome economic malaise.
TikTok parent ByteDance provided information to help Chinese authorities nab Hong Kong activists, according to former exec. Beijing prepares to open a spy base in Cuba, say US officials. And emphasis on the metric of innovation rather than diffusion, may exaggerate China’s tech prowess.
And Two Takes on China’s Covid recovery
“[China’s] gradual, consumer-led rehabilitation is well underway and is likely to continue” - Andy Rothman, Matthews Asia
“Over the next decade . . . the growth that [China] is capable of delivering, is probably not much more than about two or three percent” - George Magnus, Oxford University
Did debt ceiling impasse boost China’s yuan goals?
Following the recent U.S. debt ceiling impasse, now resolved, some are wondering whether China is ready to make a stronger push for a more international Chinese currency.
“Similar to [the global financial crisis], which prompted the start of Beijing’s yuan internationalization efforts in 2009, analysts said the months-long U.S. debt ceiling stand-off, together with U.S. decoupling threats and a succession of U.S. interest rate increases, could be a defining moment for the Chinese currency,” report the South China Morning Post’s Ralph Jennings and Amanda Lee.
“International financial stability is in China’s advantage, but does it have to be U.S. led?” asks Willamette University economist Liang Yan. “It has been proven that the U.S. is not a great leader in this system.”
There are a number of ways that China can expand the use of the Chinese currency including through yuan investment in Belt and Road projects, promoting the use of a digital yuan, and through more yuan settlement with China’s trading partners.
Already Russia, Saudi Arabia, Thailand, Brazil and Argentina, as well as several other countries, are accepting the yuan in exchange for energy sales to China, including oil and gas.
“China believes the U.S.-led system, especially the hegemony of the U.S. dollar, includes rules that play against China’s interests,” says Sun Yun, director of the China program at the Stimson Center. “Therefore, to gradually undermine U.S. credibility and revise that system is in China’s long-term interest.”
But it won’t be easy. “The biggest single obstacle to that goal is not just the entrenched role of the U.S. dollar, but also key is Beijing’s unwillingness to take its hand off its financial system and loosen the capital account,” said Dexter Roberts, director of China affairs at the Mansfield Center at the University of Montana.
“Until it does that—a move which by definition means lessening party control over the economy and allowing for example, independent banks to decide where to lend, and that could lead to capital flight—other countries will not be willing to hold substantial yuan reserves.
As the US government flirted with a debt default last month, some analysts see more opportunities opening up for China and the yuan. Illustration: Brian Wang
Top Russian banker predicts China yuan rise
A top Russian banker has said China’s yuan has momentum towards unseating the U.S. dollar, reports Reuters.
"The long historical era of the dominance of the American dollar is coming to an end," Andrei Kostin, CEO of VTB, Russia's second largest bank, told Reuters, noting that his bank was in discussions to use yuan settlement with third countries.
Calling the sanctions against Russia over its invasion of Ukraine unfair, and saying they would “backfire” on the West, Kostin said many countries were already moving to settle payments outside the U.S. dollar and the euro, while China was gradually loosening currency restrictions.
"China understands that they will not become world economic power Number 1 if they keep their yuan as a non-convertible currency," said Kostin, who himself has faced sanctions by the U.S. since 2018.
Asked if he feared the prospect of a new Cold War given global tensions, Kostin said the prospect of a “hot war” was far more dangerous.
"We have already entered into a hot war," Kostin said of the crisis with Ukraine. "It is not cold when there are so many Western weapons and a lot of Western services and military advisers involved. The situation is worse than in the Cold War, it is very difficult and alarming."
I hardly expected to find myself agreeing with a senior Russian banker but I can’t find much wrong with Kostin’s point about how a non-convertible yuan is an insurmountable obstacle to China achieving world economic power status . . .
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