Baby steps towards full convertibility for RMB

China has been aggressively promoting the usage of RMB in international trade, preparing it for the eventual full convertibility of the currency. Besides opening access to its domestic bond market to selected foreign investors that I blogged before, it also starts to allow trading of the RMB against Malaysian Ringgit in its domestic FX market today. The Ringgit is a good guinea pig. Since China is already Malaysia’s largest trading partner, it makes sense to try to settle bilateral trade in their respective currencies rather than through the USD. On the other hand, both are effectively soft-pegged to the dollar, eliminating possibility for wild currency swings.

Separately, McDonald’s is selling $29mn RMB denominated bonds in Hong Kong. This is the first non-financial foreign entity to try this issuance. Yes, China is sticking to its game plan, that is to promote more usage of the RMB in international trade and in financial products. All these efforts eventually will lead to full convertibility a few years down the road, and challenge the USD’s role as the global reserve currency for real.

Battle lines hardened in the Chinese property market

With the CBRC, China’s powerful banking regulator, banning 3rd mortgages and tightening other banking operations like securitization, it seems like the Chinese government, the central government at least, has hardened its resolve in pricking the property bubble.

However, the push back from the property lobby is forceful as well, especially now it seems that government is serious and the tightening measures might last a while. An economist from TsingHua University had calculated earlier on that if the tightening measures last for more than a year, more than 45% of Chinese property companies will encounter solvency problem.

A strong and faithful ally to the property lobby is China’s local governments. Yes, China is not all synchronized and monolithic, and there is indeed internal politics. Many ocal governments absolutely live on land sales. Due to the tightening measures, land sales had been way below budget during the first half of the year. In Hangzhou, a prosperous coastal city, the government sold only 22% of land budged for 2010. Shanghai, China’s money center, sold 29% of its annual plan during the same period.

So in order to secure more revenue, the local governments will definitely push for more loosening, especially now that the economy has weakened. One can only hope that the sane mandarins, who have been calling for “tolerance for a new lower growth rate”, will prevail, but somehow I’m not particularly optimistic.

Is the RMB going to depreciate?

After reporting the highest amount of trade surplus in 18 months, and hearing an expected cacophony of calls for RMB appreciation, the spot Yuan rate has actually traded down. The dramatic fall in foreign currency loans undertaken by Chinese exporters has also indicated sharply lowered expectation for any appreciation, if at all.

According to the Century Weekly, foreign currency loans plummeted by USD5.6bn in July, on the heel of USD0.7bn and USD1.4bn declines in June and May, respectively.

Chinese exporters traditionally take out these loans to supplement their income if they expect the RMB to appreciate. The last time these loans fell was during the 7/2008-2/20009 period, at the height of the financial crisis. In fact the RMB was even expected to depreciate in late 2008.

Could this be a rerun?

China buying more JGB

In an attempt to diversify from the USD, China bought more JGB in June.

China purchased a net 456.4 billion yen ($5.3 billion) of Japanese debt in June, following net buying of 735.2 billion yen in May that was the most in records dating from 2005, according to a report released today by the Ministry of Finance in Tokyo.

This is expected as the nation switched to a soft peg referencing to a basket of currencies.  Although Japan is the 4th largest export market of China, making up about 10% of its exports, the trade is more or less balanced. As such China’s trade surplus against Japan was only about USD20bn in 2009.

Since China has so far bought about USD20bn JGB this year, has it used up its quota then? Not likely. China has been under-weighting JGB in its reserves since 2006. If China does indeed intent to bring its currency to be trade weighted, there’ll be more JGB to buy, at the expense of US Treasuries naturally.

A side effect of buying more JGB is pushing up the Yen and Japanese Finance Minister Yoshihiko Noda commented yesterday that he’s watching the matter. But this may be a price that Japan has to paid, as it becomes increasingly relying on foreign lenders. Savings rate tumbled in  to a mere 2.2% in 2007 from 11.4% of a decade earlier, as economic stagnation and an aging population takes it toll.

Sparring of words over the RMB

All focus has been on the “unusually uncertain” comment by Bernanke, though the hearing touched on Chinese currency issue as well. As reported by Reuters:

Under questioning by one of those lawmakers, Senator Sherrod Brown, Bernanke answered “yes” when asked if he stood by a statement he made several years ago calling China’s exchange-rate policy an effective subsidy.

When pressed how much China’s yuan was undervalued, Bernanke said: “The numbers that you see in the literature range between the 10 and 30 percent range.”

As November approaches, it’s only expected that the US will push harder on this front. But are they going to get their wish fulfilled? This one is from AFP:

“The exchange rate of the currency will decline if it becomes necessary to support exports,” Zhou [Qiren, a member of the central bank’s monetary policy committee] told the Asahi Shimbun [of Japan] in an interview, according to the paper’s English-language website.

I don’t know about you, but I think Chinese exports will weaken substantially in H2 as the US non-recovery recovery sputters and European austerity kicks in. China’s own stimulus is also losing steam, so much so that the banks are quietly relenting on strict lending restrictions.  If you think China’s going to become a good Samaritan in this environment, I’ve got a bridge to sell you.