Internationalization: The key to RMB flexibility
Ba Shusong

RECENTLY, the fast appreciation of the Chinese currency has become a major concern both at home and abroad. Ba Shusong, a researcher with the Development Research Center of the State Council, in a recent article for the 21st Century Business Herald, suggested that the renminbi exchange rate can become more flexible if it is fully internationalized.
In the world of globalization, opening up has become an inevitable choice for the Chinese financial industry. The internationalization of the Chinese currency-renminbi, as an important channel for China to influence the global economy, has been discussed and researched repeatedly by scholars both at home and abroad.
Renminbi internationalization is the economic process during which the Chinese currency crosses the border and becomes a generally accepted measure of value, payment and wealth storage. The internationalization of the renminbi should follow a gradual process from the domestic market to the international market, and its function in the international market will transform from low to high. Currently, the function of the renminbi as an international currency is very limited, limited only to neighboring countries, and is at the early stage of gaining regional acceptance.
A critical dilemma is what impact the internationalization of the renminbi will have on the domestic banking industry. First let’s take a look at the influences on banking businesses. The major businesses of commercial banks include asset business, liability business and intermediary business. Extensive overseas demand for and the expanded circulation of renminbi will exert great influence on the various businesses conducted by domestic banks.
Asset business is a major and traditional income resource for commercial banks. In recent years, the renminbi asset business has developed to some extent. However, as the Chinese currency is not convertible yet and capital accounts are under government control, domestic financial institutions’ renminbi asset businesses are still at an early stage of overseas development.
The renminbi liability business mainly refers to renminbi deposit business, such as current deposits and fixed deposits. At present, renminbi under capital accounts is not fully convertible. The major currencies traded by Chinese banks in the offshore market are the U.S. dollar, the euro, the Japanese yen, the pound, and the Hong Kong dollar, while renminbi offshore deposit trading has not started yet. Therefore, domestic deposit business is temporarily protected from outside influence and is mostly influenced by multiple financial assets operating within the domestic stock and property markets.
With the gradual opening up of capital accounts and the internationalization of the renminbi, offshore renminbi deposit business will eventually be conducted in the international market. Recently, with the continuous deprecia-tion of the U.S. dollar and the diversification of international currencies, U.S. dollar deposits have decreased to some extent. According to the experiences of U.S. dollar internationalization, stimulated by transaction costs and interest yields, the U.S. dollar market in Europe diverted some of the U.S. domestic dollar deposits due to interest rate differences between the two markets. Renminbi internationalization will have a similar effect.
The major revenue of commercial banks comes from deposit and loan interest differences and charges for intermediary business. The low cost, low risk and high yield nature of intermediary business pushes the business to develop fast. International trade and inter-bank intermediary businesses prefer to use widely circulating currencies. Renminbi internationalization can reduce currency exchange costs and risks, thus making international intermediary business more convenient.
Fast economic development and the rising status of the renminbi can boost the country’s international trade, international payment in renminbi and capital injection into the country’s capital market. Similarly, Chinese banks will be able to develop international intermediary business through international settlements, international bankcard and fund custody, which will bring stable profits to the banks.
Moreover, renminbi internationalization can make the currency exchange rate more flexible and determined by market forces, which will be conducive to the pricing, marketing and operation of renminbi derivatives. Financial derivatives are independent of the balance sheet of the commercial banks, so this sector of banking business won’t affect the asset and liability situation of the banks but can bring in more service charges. Since the 1990s, financial derivatives have gradually become a major source of bank profits.
If the renminbi is fully internationalized, Chinese banks will be able to develop more monetary financial derivatives, such as forward foreign exchange contracts, foreign exchange futures and options, and currency swaps. In this way, Chinese commercial banks can expand their business and innovate to create greater profits at lower risk.
Second, renminbi internationalization will be helpful for the overseas development of domestic banks. During the process of internationalization, the banks’ overseas renminbi business will be extended, and domestic financial institutions will be required to expand in overseas markets. The two will in turn provide new opportunities for renminbi internationalization.
Currently, renminbi cannot be invested in the overseas market, meaning most of the Chinese currency will eventually flow into the domestic market. The major channels for the backward flow of renminbi include non-residents’ spending when they travel in China, assets purchase or direct investment in the mainland. Moreover, some renminbi reenters the country via the banking system through two ways: Firstly, non-residents deposit renminbi directly into border financial institutions (for instance, banks in bordering regions like Inner Mongolia and Yunnan Province allow qualified residents from neighboring countries to deposit renminbi); the other is re-deposits by foreign banks of their renminbi into domestic banks.
China has been working on establishing a renminbi reflux mechanism. At the end of 2003, the People’s Bank of China allowed Hong Kong banks to open individual deposit, exchange, remittance and bankcard services. This policy was officially launched on February 25, 2004, indicating the central bank’s effort to establish a reflux mechanism. At the end of 2004, renminbi business in Macao also started. Later, in January 2007, the central bank allowed mainland financial institutions to issue renminbi financial bonds in Hong Kong, which further expanded the renminbi reflux channel. To date, China has established official renminbi circulation channels in Hong Kong and Macao. Meanwhile, major domestic commercial banks have set up operating branches in major international financial centers as well as regions with heavy trade activity with China. They actively carry out renminbi business, and their overseas service network is gradually taking shape.
The overseas branches of commercial banks provide circulation channels for renminbi and are equivalent to the creation of an infrastructure for renminbi cross-border circulation. Through the legal channel of the commercial banks, the renminbi inflow and outflow will be more open and convenient. Moreover, standardized renminbi circulation in the international market can provide legal ways for supervisory departments to track renminbi circulation. In addition, under the current international environment, using more renminbi in international settlement can ease the pressure of renminbi appreciation.
Experience in the United States shows that U.S. banks can borrow money from their overseas branches to cover the liquidity shortage in order to ease pressures from domestic interest rate hikes. Therefore, with the internationalization of the renminbi, Chinese domestic banks can solve their liquidity problem by making full use of their overseas branches, instead of frequently using interest rates to combat liquidity pressures.
In a word, renminbi internationalization will exert positive influences on bank profits and toward upgrading the business structure of banks.

(The Daily Mail-Beijing Review Articles Exchange Item)
 

Adrian Hamilton
Aimen Malik

THE Chinese say they are still determined to take the Olympic torch through Tibet, for all the demonstrations and worldwide protests. Of course they are. The West consistently misunderstands China’s attitude toward Tibet. For Beijing, it is not about the Tibetans and their treatment of them. It is about the territorial integrity of their country.
There is nothing new in what the Chinese are doing in Tibet, or to the Uighurs of Central Asia. Stalin did the same thing in the Soviet Union, moving whole populations out of areas to other parts in an effort to destroy their nationalism and pouring Russian settlers in their place. Half the problems of Ukraine, the Baltics and the Central Asian republics are the residues of this policy.
Nor is the Chinese policy of reducing local culture to a kind of tourist antiquarianism new to the world. It was, after all, what the Spanish did in Latin America, the US did with the red Indians after they had swamped the American West and what the Australians have done with the Aborigines.
When Australia’s new prime ninister, the refreshing Kevin Rudd, apologized for the “stolen generation” of Aborigines he was accepting responsibility and the shame of a deliberate policy of taking indigenous children and trying to re-educate them in Australian families on the grounds that only enforced uniculturalism could work with so backward a people. You get exactly the same approach, and racism, in the official Chinese statements on Tibet, never mind the blogs in China on the subject. But it is precisely because we have been here before that the outside world needs to be clear in our dealings with Beijing over Tibet.
It is all very well — and right — to express outrage at Chinese oppression of political voices in Tibet as if we are talking about monks in Burma or Palestinians in the West Bank. But Tibet is not Burma, an independent country suffering the oppression of its own rulers, nor Palestine, a land occupied but not claimed (or at least not all of it) by its conquerors. It would be a lot easier to work out a response if it were.
The Chinese regard their claim on Tibet as absolute and they simply will not compromise on it. And, frankly, the West, which went shamefully along with the invasion a half-century ago with only a squeak of protest, is in no mood to face a total confrontation on the issue. Calling for self-determination is easy enough, but so long as Beijing regards this as a step to unwarranted independence, the calls are going to go unheeded. Which is why the Dalai Lama has always sought not independence for Tibet but a self-governing role within China. The only trouble, as we have seen in the last few weeks, is that Beijing has no interest in this either. Their determination is not multiculturalism but the total absorption of the country within mainland China.
Everything that China has done — the settlement of nomads, the building of road and rail links, the control of trade, the investment in raw materials and the insidious inducements to intermarriage is directed toward making Tibet another homogenous part of the Chinese nation. To the Chinese, this is all perfectly logical and, it has to be said, almost universally accepted.
To them, the Tibetans should be grateful for everything that the Chinese have done in increasing investment, opening up transport links and encouraging immigration.
If, as one official put it, the Tibetans have been left behind by the growth of Han Chinese businesses in Tibet, it is not because of exclusion but because they are “lazy” and in thrall to an outdated feudal church hierarchy. China is offering them “freedom”, freedom from want and religious credulity. Demonstrations along the Olympic torch route are not going to alter this, nor protests within Tibet.
And if the outside world does value Tibetan culture, there is something else that it can also do, which is to support the Tibetan refugee communities. As any visitor to some of the camps in Kerala, or elsewhere, can testify, the Indians have allowed the Tibetans in, but kept them isolated and in a dire state of poverty. The actions to exclude and drive out Tibetan refugees by that fabled, newly-democratizing kingdom of Bhutan are little short of barbaric.
The Olympic protests have drawn the attention of the world, including China’s, to the concern felt by the public over Tibet. Now it is up to our governments to show the same concern and resolution.

—Khaleej Times



Honouring our Common Ground
Fatin Bundagji

IT IS said that the only “constant” in life is “change”. However, in the world of today, the only” constant” we seem to witness is the emerging threat of our extinction as a human race brought on by “conflict” rather than “change”. I am not referring to the conflict between opposite cultures and religions, nor am I referring to the power-conflict between nations, governments and people fighting to secure their rights, their dignity and their homelands. What I am referring to instead is the irreversible and terminal effect of conflict created by modern man’s insatiable appetite for worldly goods — at the expense of our Earth.
Luckily for us, there is a solution in the making. As the world becomes more and more interconnected and as people become more and more informed, an environmentally responsible “global culture” is taking hold as people-of-the-world are putting pressure on businesses, industries and governments to carry out environmentally friendly and socially responsible practices. Whereas before such practices went about unregulated, unaccounted-for and unpunished, today, with the reality of global warming staring us in the face, that will hopefully become a thing of the past.
In two weeks time there is a powerful unifying force that is coming our way. On April 22 the whole world will observe an international event that was born over 37 years ago: Earth Day. Most of us know little about this event, and maybe some of us may not have even heard of it. The majority of people celebrate it on April 22 while others celebrate it on March 20 or 21, which depends on which day spring of that year falls. Whatever the date, the importance here is in the impact such an event has on how we choose to live responsibly in our fragile world.
Each year people around the world come together in their local communities to engage in activities that builds the base of support for environmental protection programs. These group activities rekindle public commitment and build community volunteerism through a wide range of events that aim to renew local and global commitment to preserving the bounties of our Earth by building a safer, healthier and cleaner world for those living in it presently — as well as for those who will be part of it sometime in the future. So who was the father of Earth Day and how did a simple vision of 37 years ago become a reality that we are benefiting from today? His name was Gaylord Nelson; he was a senator from Wisconsin in the US; and this is his story:
For several years, it had been troubling Sen. Nelson that the state of the environment was simply not on the political agenda of his country. In 1962, he decided to change that by persuading President Kennedy to give visibility to this issue by going on a national conservation tour. Even though the tour did not succeed in putting the issue onto the national political agenda, it did nevertheless plant the seed for the future success of Earth Day.
Six years later in 1969, at a time when anti-Vietnam War demonstrations called “teach-ins,” had spread to college campuses all across the nation, Sen. Nelson decided to organize a huge grassroots protest over what was happening to the environment through demonstrations such as the anti-Vietnam War “teach-ins”. He was convinced that if he could tap into the environmental concerns of the general public and infuse the student anti-war energy into the environmental cause, he could generate a large national demonstration that would force this issue onto the political agenda. It was a big gamble, but worth a try, and so he did. At a conference in Seattle in September 1969, he announced that in the spring of 1970 there would be a nationwide grassroots demonstration on behalf of the environment and invited everyone to participate. On April 22, 1970, 20 million Americans took to the streets, parks and auditoriums to demonstrate on behalf of a healthy, sustainable environment.

—Arab News