The offshore yuan has just cracked all-time lows against the dollar in active trading since its introduction in Hong Kong early in the post-crisis period; as it pushes 6.80 to the greenback - Beijing's earlier post-Brexit, informally suggested floor to defend for 2016 - it's worth wondering how much of this is related to fears of a prospective Donald Trump presidency, however unlikely that appears to be with recent polls.
Granted, the euro, pound, and yen are all exhibiting softness of late, but given that the yuan is now part of the IMF's elite SDR reserve currency basket, as well, it's becoming more plausible that the RMB is now influencing these other alternatives to the dollar as opposed to merely shadowing them as it has done so in the wake of the shock Brexit vote four months ago.
Clearly, in the unlikely event that Trump wins, a protectionist backlash against China will loom large over Sino-US relations. In these last 15 days of the campaign, therefore, the yuan could be a key barometer of the global economy's true judgment of the chances that Trump could yet pull off such a historic upset.
Already, the yuan seems to be signaling an unease that Hillary Clinton still hasn't put this contest squarely away. There's a nagging feeling somewhere in this steady slide to 6.80/USD or even beyond that the polls which show 7-12 point leads for Hillary have been deliberately skewed in favor of registered Democrats - how else to explain the virtual tie shown by some conservative-leaning surveys even at this juncture?
So if the mainstream Western media is indeed trying to discourage potential Trump sympathizers from even thinking he can still win, things could already be more precarious than first meets the eye. This is just what Trump needs to squeeze out every last drop of the anti-establishment, anti-elite populist vote: and just the kind of shenanigan that feeds the cynicism of the large independent segment of the electorate whose apathy towards Hillary could in the end do far more harm than their aversion to Trump.
But worst of all, if this unabashed and blatant media cheerleading for Hillary ironically turns her own lukewarm supporters away - i.e. if they're so unenthusiastic about her essentially status-quo platform, given her own deep flaws, that they possibly won't go out to vote at all except if they genuinely think the fiasco of a Trump presidency were still possible - the Western elite and establishment could actually be digging their own grave. If they were really that smart, they'd wise up to the dangers of such an approach - unless perhaps they're unwittingly being manipulated by an even smaller clique among themselves who are even more exclusively "in the know" about things.
We got sort of a warning four months ago with Brexit as to how our society in the developed rich world has apparently moved on from the entire basis of working assumptions that our leaders cling to. Even then, it should have become obvious to the elites that their very tendency to dismiss or downplay the populist threat to their ever shakier consensus may actually have contributed significantly to their own stunning loss of legitimacy. At the last minute, it seems, enough apathetic British voters became so convinced that Brexit would be handily defeated that they didn't even bother showing up at the polling booths to actually play their part defeating it - thereby sealing the doom of the "remain" cause.
It would be quite a spectacle if the elites now make the same blunder - only monumentally bigger and more far reaching.
If you're China, you have little excuse or rationale left to not take any chances.
Monday, October 24, 2016
Thursday, October 20, 2016
How low will the yuan go?
As the yuan dips further below six-year lows against the dollar, it's worth asking how low it will go, and what constitutes a reasonable floor.
The fact that even the heavily restricted onshore RMB is already pushing 6.75 (closed 6.7449 today) indicates that Beijing has convinced the world that it has enough control of the currency to prevent a speculative rout. But with so much uncertainty looming over the global economy, especially what with the rise of nationalist populism in the West that's fueling an unprecedented rich-world backlash against trade, it's seemingly at the mercy of forces beyond its control. So even though it's actually helped China that the West is increasingly exposed as actually the weaker link in the global economy, the cover that this gives it to weaken the yuan won't last much longer until concerns over its own health come back to the fore.
Back on July 2, 2015 in Beijing, during my last trip to China, I asked my uncle, a mainland steel trader, what the yuan would go to if it were allowed to free-float. This was the week before the worst of the summer stock market crash, and the yuan was sitting at 6.21 to the dollar - propped up, as I later learned, by heavy selling of forex reserves by PBOC. He told me that it would go down by about 10 percent, putting it at 6.90 to the dollar.
Sure enough, less than six weeks later China stunned the world by devaluing nearly 2 percent one-off on August 11, in the first of several waves of reset that have now seen the yuan shave about 8 percent against the greenback. In other words, we're mostly there: another 2 percent depreciation perhaps, and we'll be at the floor as perceived by someone intimately familiar with Chinese markets and economic conditions.
Beyond this, it's highly tempting for Beijing to devalue even further should weakness persist in Europe and the UK (i.e. Brexit), and even more so if Japan buckles under pressure and starts devaluing the yen at last, while the Fed still dawdles over its determination to normalize interest rates in this unusually prolonged hike cycle. The drawback to further currency softness, though, will be quite obvious: it sends the wrong signal about commitment to transition the Chinese economy from exports to domestic consumption, even as it raises more hackles with trade partners about not cutting them much-needed slack.
So for the time being, as Western uncertainties about trade and globalization more broadly are worked out, China must strive to pull some more weight as is now widely expected and demanded of it. It must draw some line in the sand that it won't cross regardless of how hairy things get with further easing or bailouts especially in Europe and the UK; it must also hold its ground as the Fed likely bargains with the new US administration and Congress to raise rates at an acceptable clip on the condition that the latter enact more aggressive fiscal support and preferably targeted deregulation of the most choked-up or clogged sectors.
Ideally, the yuan shouldn't have to decline to 7.0 or even 6.90, but will decisively stabilize around the 6.80 level from which it subsequently strengthened in the resounding recovery from the financial crisis. Then, as back in the 2011-13 appreciation period, it should claw its way back up beginning in late 2018 or early 2019, as the "L-shaped recovery" is completed, to return to the mid- and eventually low-6's; by the end of Xi Jinping's second term in 2022, it should be stable in the 6.05-6.25 range at which it hovered in 2014-15, before breaking in the August 2015 devaluation.
This won't sit well with certain committed neoliberal ideologues who insist that China fully subject its currency to "market forces", as if the West still actually plays by such "market forces" itself. But such voices are the ones now finally being rejected and discredited despite having brayed the same old spiel for so long. If Beijing continues to exercise discipline against its own corruption and resolve in the face of those with a vested interest in its failure, a China-friendly - even to some degree China-centric - new global financial architecture is likely to emerge early next decade.
The fact that even the heavily restricted onshore RMB is already pushing 6.75 (closed 6.7449 today) indicates that Beijing has convinced the world that it has enough control of the currency to prevent a speculative rout. But with so much uncertainty looming over the global economy, especially what with the rise of nationalist populism in the West that's fueling an unprecedented rich-world backlash against trade, it's seemingly at the mercy of forces beyond its control. So even though it's actually helped China that the West is increasingly exposed as actually the weaker link in the global economy, the cover that this gives it to weaken the yuan won't last much longer until concerns over its own health come back to the fore.
Back on July 2, 2015 in Beijing, during my last trip to China, I asked my uncle, a mainland steel trader, what the yuan would go to if it were allowed to free-float. This was the week before the worst of the summer stock market crash, and the yuan was sitting at 6.21 to the dollar - propped up, as I later learned, by heavy selling of forex reserves by PBOC. He told me that it would go down by about 10 percent, putting it at 6.90 to the dollar.
Sure enough, less than six weeks later China stunned the world by devaluing nearly 2 percent one-off on August 11, in the first of several waves of reset that have now seen the yuan shave about 8 percent against the greenback. In other words, we're mostly there: another 2 percent depreciation perhaps, and we'll be at the floor as perceived by someone intimately familiar with Chinese markets and economic conditions.
Beyond this, it's highly tempting for Beijing to devalue even further should weakness persist in Europe and the UK (i.e. Brexit), and even more so if Japan buckles under pressure and starts devaluing the yen at last, while the Fed still dawdles over its determination to normalize interest rates in this unusually prolonged hike cycle. The drawback to further currency softness, though, will be quite obvious: it sends the wrong signal about commitment to transition the Chinese economy from exports to domestic consumption, even as it raises more hackles with trade partners about not cutting them much-needed slack.
So for the time being, as Western uncertainties about trade and globalization more broadly are worked out, China must strive to pull some more weight as is now widely expected and demanded of it. It must draw some line in the sand that it won't cross regardless of how hairy things get with further easing or bailouts especially in Europe and the UK; it must also hold its ground as the Fed likely bargains with the new US administration and Congress to raise rates at an acceptable clip on the condition that the latter enact more aggressive fiscal support and preferably targeted deregulation of the most choked-up or clogged sectors.
Ideally, the yuan shouldn't have to decline to 7.0 or even 6.90, but will decisively stabilize around the 6.80 level from which it subsequently strengthened in the resounding recovery from the financial crisis. Then, as back in the 2011-13 appreciation period, it should claw its way back up beginning in late 2018 or early 2019, as the "L-shaped recovery" is completed, to return to the mid- and eventually low-6's; by the end of Xi Jinping's second term in 2022, it should be stable in the 6.05-6.25 range at which it hovered in 2014-15, before breaking in the August 2015 devaluation.
This won't sit well with certain committed neoliberal ideologues who insist that China fully subject its currency to "market forces", as if the West still actually plays by such "market forces" itself. But such voices are the ones now finally being rejected and discredited despite having brayed the same old spiel for so long. If Beijing continues to exercise discipline against its own corruption and resolve in the face of those with a vested interest in its failure, a China-friendly - even to some degree China-centric - new global financial architecture is likely to emerge early next decade.
Wednesday, October 19, 2016
Flat is the new up for China
Third quarter GDP came in at 6.7 percent, in line with analyst expectations and keeping a perfectly flat 6.7 percent clip for all quarters of 2016 so far, but some caveats are in order.
After year-on-year monthly GDP of 6.9 and 7.2 percent for July and August, the year-on-year figure for September must have been comparatively very low to drag down the overall Q3 print to 6.7 percent.
The industrial recovery which has powered the economic stabilization since last winter looks fragile. Year-on-year industrial output was back down to 6.1 percent in September, well below the projected 6.4 percent; while this may be a temporary blip, it underscores fears of the unsustainability of growth that's still largely dependent on secondary industry (manufacturing and construction), even as tertiary industry (consumption and services) account for a greater portion of new economic activity. Indeed, as is the case with all economies, secondary industry drives tertiary industry - after all, that's what makes them secondary and tertiary to begin with.
Encouraging signs are still to be found, though: both fixed-asset investment (8.2 percent) and retail sales (10.7 percent) in September beat estimates by 0.1 percentage point; the latter in particular points to good Q4 consumption and services performance that should again compensate for declining industrial and investment growth, at least until Q1 2017, by which time Beijing may need to ramp up more targeted fiscal and policy support for its secondary sectors. By then, however, the hope is that the gloomy global economic and especially trade outlook will have brightened with the political uncertainty in the West having eased or at least plateaued from the current downward trend.
The yuan and Chinese stock market seem to be neutral in the wake of the latest news, and PBOC's earlier floor of 6.8 to the dollar through year-end appears to remain in place. Flat is the new up for China - and more generally for the global economy in the present environment, as well.
After year-on-year monthly GDP of 6.9 and 7.2 percent for July and August, the year-on-year figure for September must have been comparatively very low to drag down the overall Q3 print to 6.7 percent.
The industrial recovery which has powered the economic stabilization since last winter looks fragile. Year-on-year industrial output was back down to 6.1 percent in September, well below the projected 6.4 percent; while this may be a temporary blip, it underscores fears of the unsustainability of growth that's still largely dependent on secondary industry (manufacturing and construction), even as tertiary industry (consumption and services) account for a greater portion of new economic activity. Indeed, as is the case with all economies, secondary industry drives tertiary industry - after all, that's what makes them secondary and tertiary to begin with.
Encouraging signs are still to be found, though: both fixed-asset investment (8.2 percent) and retail sales (10.7 percent) in September beat estimates by 0.1 percentage point; the latter in particular points to good Q4 consumption and services performance that should again compensate for declining industrial and investment growth, at least until Q1 2017, by which time Beijing may need to ramp up more targeted fiscal and policy support for its secondary sectors. By then, however, the hope is that the gloomy global economic and especially trade outlook will have brightened with the political uncertainty in the West having eased or at least plateaued from the current downward trend.
The yuan and Chinese stock market seem to be neutral in the wake of the latest news, and PBOC's earlier floor of 6.8 to the dollar through year-end appears to remain in place. Flat is the new up for China - and more generally for the global economy in the present environment, as well.
Sunday, October 16, 2016
China isn't the global economy's weak link: the West is
Last Wednesday and Thursday, consecutive releases of Chinese trade and inflation data painted a mixed picture: the former worse than expected, the latter better. Does this point to a domestically driven Chinese recovery or stabilization? Tuesday's upcoming Q3 GDP figures - to include the breakouts for industrial production, fixed asset investment, and retail sales - will go a long way to determining that. As well, Monday's lending figures - total social financing, outstanding loan growth, and money supply growth - will be indicative of credit intensity and how supportive it is of continued fast growth.
Though it's becoming clear that trade volume is one of those alternate metrics which is no longer as reliable a proxy for Chinese GDP as it used to be, China perma-bears like Gordon Chang still cite it as proof that Beijing is fabricating the latter. Of course, they do so while ignoring other favored proxy data that has recently swung into agreement with solid official growth, like perking up electricity usage.
Plus, with official manufacturing PMI for September at a healthy 50.4 (the same as the previous month) and the alternate Caixin Markit private sector-focused PMI likewise in mild expansionary territory (50.1), it's strongly suggestive of a tentative industrial stabilization driven by domestic demand in Q3. And because services and consumption tend to lag industry and investment, that also suggests robust growth in the former during Q4 - again domestically driven.
But China still depends heavily on the global economy of which it is a linchpin: as Xi Jinping highlighted at the BRICS summit, that makes it imperative to Beijing that the damaging uncertainty created by the Western populist backlash against globalization isn't allowed to actually shift gears in reverse.
The West needs a good does of both demand-side and supply-side boosts to kickstart moribund economic engines. Keynes and Friedman can no longer continue to exert such rigid policy gridlock: the rich world needs both fiscal stimulus and tax cuts plus deregulation.
In that regard, perhaps China is belatedly emerging as a strong and not weak link in the global economy, after all: it's already done massive injections of Keynes to stop the economy from simply crashing, even as it's trying to use the extra time it's bought to haltingly introduce Friedman - with Chinese characteristics, of course.
So even though we may well see the yuan hit its declared lower tolerable limit for the remainder of 2016 - 6.8 to the dollar as loosely set by PBOC in the wake of Brexit - already the markets are increasingly of the mind that this is a natural reflection of global weakness, especially in Europe and Japan, and not particular Chinese vulnerability.
That European and Japanese weakness, in turn, is largely a consequence of residual US softness: specifically, of a Fed that's only gradually begun to recognize that this round of "rate normalization" simply can't go the way previous ones have, given the long-term ill effects of the 2008 crisis on longer term productivity, labor participation, and investment levels, which have together rendered the economy more vulnerable to relative illiquidity even from modest interest rate hikes than would otherwise have been the case.
QE and extraordinary monetary policy have played their role, but Janet Yellen herself now sees the possible necessity of a "high-pressure economy" nonetheless - read: a more comprehensive combination of policy measures to get the whole economic system with its constituent interconnected parts firing on all cylinders again.
Sort of like what China's already attempting. But even China will reach a limit of what it can achieve without a robust and broad US and Western economic recovery to ride atop once more - and soon.
Though it's becoming clear that trade volume is one of those alternate metrics which is no longer as reliable a proxy for Chinese GDP as it used to be, China perma-bears like Gordon Chang still cite it as proof that Beijing is fabricating the latter. Of course, they do so while ignoring other favored proxy data that has recently swung into agreement with solid official growth, like perking up electricity usage.
Plus, with official manufacturing PMI for September at a healthy 50.4 (the same as the previous month) and the alternate Caixin Markit private sector-focused PMI likewise in mild expansionary territory (50.1), it's strongly suggestive of a tentative industrial stabilization driven by domestic demand in Q3. And because services and consumption tend to lag industry and investment, that also suggests robust growth in the former during Q4 - again domestically driven.
But China still depends heavily on the global economy of which it is a linchpin: as Xi Jinping highlighted at the BRICS summit, that makes it imperative to Beijing that the damaging uncertainty created by the Western populist backlash against globalization isn't allowed to actually shift gears in reverse.
The West needs a good does of both demand-side and supply-side boosts to kickstart moribund economic engines. Keynes and Friedman can no longer continue to exert such rigid policy gridlock: the rich world needs both fiscal stimulus and tax cuts plus deregulation.
In that regard, perhaps China is belatedly emerging as a strong and not weak link in the global economy, after all: it's already done massive injections of Keynes to stop the economy from simply crashing, even as it's trying to use the extra time it's bought to haltingly introduce Friedman - with Chinese characteristics, of course.
So even though we may well see the yuan hit its declared lower tolerable limit for the remainder of 2016 - 6.8 to the dollar as loosely set by PBOC in the wake of Brexit - already the markets are increasingly of the mind that this is a natural reflection of global weakness, especially in Europe and Japan, and not particular Chinese vulnerability.
That European and Japanese weakness, in turn, is largely a consequence of residual US softness: specifically, of a Fed that's only gradually begun to recognize that this round of "rate normalization" simply can't go the way previous ones have, given the long-term ill effects of the 2008 crisis on longer term productivity, labor participation, and investment levels, which have together rendered the economy more vulnerable to relative illiquidity even from modest interest rate hikes than would otherwise have been the case.
QE and extraordinary monetary policy have played their role, but Janet Yellen herself now sees the possible necessity of a "high-pressure economy" nonetheless - read: a more comprehensive combination of policy measures to get the whole economic system with its constituent interconnected parts firing on all cylinders again.
Sort of like what China's already attempting. But even China will reach a limit of what it can achieve without a robust and broad US and Western economic recovery to ride atop once more - and soon.
Tuesday, October 11, 2016
What Syria's humbling of China says about the importance of struggle
Last week's stunning defeat of the Chinese national soccer team by war-torn Syria in the 2018 World Cup qualifier may have set off a bout of jingoistic "football hooligan" street rage across the middle kingdom at being one-upped by a pathetic little rogue state - to include bloodthirsty demands for the removal of the Chinese team's coach - but in the midst of the jock fervor, it's easy to miss the far more significant symbolism of the 1-0 upset.
It's obvious from the outcome of the match that neither a vastly bigger pool of athletes to draw from nor national stability and prosperity helped a Chinese team that simply wasn't as hungry for victory as its Syrian counterpart. And why should it have? Syria is a society steeled by nearly six years of brutal civil war and violent sectarian extremism, whilst China has enjoyed a steady ascent to greater consumerist prosperity over the same period. It goes without saying which country is primed for grueling struggle of physical and psychological attrition - that is, which national crew was "bourgeois" with complacency and which was "revolutionary" in its zeal.
In a broader sense, Syria holds potentially critical lessons for China's own monumental transition from an industrial to a consumer society, which in a roughly overarching socioeconomic sense is basically a surrogate for the transition from dictatorship to democracy.
The strength of nations is forged through severe challenges and crises, no less than individual character is shaped and refined by personal trials and tribulations. And just as the hardest battle that any one of us individually must fight is that to master what lies within ourselves, so too are internal conflicts far more consequential than external ones in determining an entire people's destiny.
At a time when the free world seems increasingly paralyzed with division and self-doubt, even as so much of the unfree world still yearns for liberty, the common thread that ties all humanity together is the constant necessity of struggle itself. The worst fate for any person or nation is not failure or defeat but apathy and aimlessness which amount to a general moral surrender; suffering and strife with a perceived meaning, however flawed, are incomparably better than peace and plenty without its semblance, however authentic.
That being said, although none of us can be absolutely sure of the complete and ultimate truth of what we fight for and hold dearest for ourselves, let alone presume a position to judge the merits of those ideas and adversaries we find ourselves fighting against, we must cling to the hope that final victory is the reward for those who humble themselves enough to finally arrive at the fullness of understanding of themselves primarily and of others contingently.
As Syria has experienced in the last almost six years, war inevitably brings out the very worst in human nature; but it always has the silver lining of purging many of its participants of the illusions of self-sufficiency and self-reliance so much that a greater opportunity emerges for good to be extracted from evil than would otherwise be possible. To struggle is the essence of what it is to be human.
It's obvious from the outcome of the match that neither a vastly bigger pool of athletes to draw from nor national stability and prosperity helped a Chinese team that simply wasn't as hungry for victory as its Syrian counterpart. And why should it have? Syria is a society steeled by nearly six years of brutal civil war and violent sectarian extremism, whilst China has enjoyed a steady ascent to greater consumerist prosperity over the same period. It goes without saying which country is primed for grueling struggle of physical and psychological attrition - that is, which national crew was "bourgeois" with complacency and which was "revolutionary" in its zeal.
In a broader sense, Syria holds potentially critical lessons for China's own monumental transition from an industrial to a consumer society, which in a roughly overarching socioeconomic sense is basically a surrogate for the transition from dictatorship to democracy.
The strength of nations is forged through severe challenges and crises, no less than individual character is shaped and refined by personal trials and tribulations. And just as the hardest battle that any one of us individually must fight is that to master what lies within ourselves, so too are internal conflicts far more consequential than external ones in determining an entire people's destiny.
At a time when the free world seems increasingly paralyzed with division and self-doubt, even as so much of the unfree world still yearns for liberty, the common thread that ties all humanity together is the constant necessity of struggle itself. The worst fate for any person or nation is not failure or defeat but apathy and aimlessness which amount to a general moral surrender; suffering and strife with a perceived meaning, however flawed, are incomparably better than peace and plenty without its semblance, however authentic.
That being said, although none of us can be absolutely sure of the complete and ultimate truth of what we fight for and hold dearest for ourselves, let alone presume a position to judge the merits of those ideas and adversaries we find ourselves fighting against, we must cling to the hope that final victory is the reward for those who humble themselves enough to finally arrive at the fullness of understanding of themselves primarily and of others contingently.
As Syria has experienced in the last almost six years, war inevitably brings out the very worst in human nature; but it always has the silver lining of purging many of its participants of the illusions of self-sufficiency and self-reliance so much that a greater opportunity emerges for good to be extracted from evil than would otherwise be possible. To struggle is the essence of what it is to be human.
Sunday, October 2, 2016
China's "old economy" still drives its "new economy"
China's economy supposedly deteriorated in Q3 because its "old economy" led the alleged recovery while the "new economy" sputtered. Or not?
Perhaps some analysts are still overdue for a bit of clarification on just how "old China" relates to "new China", i.e. how the former still largely drives the latter:
The undeniable trend has been that so goes Chinese industrial production, so goes Chinese consumption - a fact that no less than some of the most bearish China analysts are especially keen to stress. A two-month lag seems plausible from the above chart: since industrial production struggled back in the May to July stretch (after the initial effects of the Q1 stimulus wore off in late April), it's not surprising that retail sales struggled in the July to September period of Q3; by the same token, however, the pickup in industrial stats in Q3 seems to have been driven by rebounds especially in August and September, so this could well be a harbinger for stronger Q4 retail and consumption figures.
So it's not a bad thing that "old China" seems to be leading the nascent recovery: it very much has to.
Besides, it's not like either industry or retail are expected to improve to anywhere near their previous highs in the chart - the government's goal of an "L-shaped" recovery doesn't call for it, but rather a plateauing that's already exhibited in the chart's right-hand side for both data series (making for an "L" with a sliding diagonal trunk).
Perhaps some analysts are still overdue for a bit of clarification on just how "old China" relates to "new China", i.e. how the former still largely drives the latter:
The undeniable trend has been that so goes Chinese industrial production, so goes Chinese consumption - a fact that no less than some of the most bearish China analysts are especially keen to stress. A two-month lag seems plausible from the above chart: since industrial production struggled back in the May to July stretch (after the initial effects of the Q1 stimulus wore off in late April), it's not surprising that retail sales struggled in the July to September period of Q3; by the same token, however, the pickup in industrial stats in Q3 seems to have been driven by rebounds especially in August and September, so this could well be a harbinger for stronger Q4 retail and consumption figures.
So it's not a bad thing that "old China" seems to be leading the nascent recovery: it very much has to.
Besides, it's not like either industry or retail are expected to improve to anywhere near their previous highs in the chart - the government's goal of an "L-shaped" recovery doesn't call for it, but rather a plateauing that's already exhibited in the chart's right-hand side for both data series (making for an "L" with a sliding diagonal trunk).
Saturday, October 1, 2016
On 67th birthday, PRC attains key global economic milestone
On the 67th anniversary of its founding in 1949, the communist People's Republic of China has been awarded inclusion of its yuan into an elite club of reserve currencies overseen by its once-hated capitalist rivals, namely the US and European-dominated IMF.
The Special Drawing Right (SDR), while largely a nominal instrument that weights the dollar, euro, pound sterling, yen, and now the yuan in a kind of composite tender for exchange-rate benchmarking and indexing purposes, still represents a key step for Beijing on its long march to parity with the developed market economies of the West, especially the US. Much like the first steps it took in the early 1980s to reintroduce market competition to the domestic socialist economy, it marks a starting point of genuine opening of the country's financial markets to international capital flows.
The mere fact that the yuan is actually being included at all - almost a year after the go-ahead was given - is a testament to the changing times. For a semi-market currency (at best) to join the ranks of mature market ones as a standard issue is an indication of how much the world at large needs China to eventually go where the SDR now says it should go, even if it's nowhere close to being there at the moment.
While Beijing now has an additional powerful impetus to push through financial reforms and liberalization, the hard realities of its present economic transition mean that the yuan is anything but ready for prime time just yet.
Significant capital outflow pressures remain, and equities in particular seem to be experiencing a lopsided imbalance with mainlanders' overseas investments absolutely swamping overseas investors' mainland investments.
On the other hand, yuan-denominated bond inflows have increased and this is an encouraging initial sign that the government and central bank's efforts to boost foreign purchases of yuan-denominated debt have borne some fruit already.
For good or ill, it seems that state policy and not private market participant demand will continue to dictate the yuan's degree of free and open international use for some time to come; even should capital controls be relaxed, this will probably only be a consequence of PBOC gaining enough confidence that its own surrogates (i.e. the large state banks) have enough "swing" clout on global RMB exchanges to sway the currency as Beijing pleases.
The increased use of RMB in global commodities trade, meanwhile, will be crucial to elevating the yuan's actual practical value as a medium of exchange in global commerce, to eventually challenge the dollar in this domain. The groundwork for such a tectonic long-term shift is being laid with the "Belt and Road" initiative, the AIIB, and other regional and global programs undertaken by Beijing to promote sustainable economic ties and links at a time when the West is confronted with the real prospect of being compelled by its own electoral politics to seal itself off and turn inward.
So the SDR inclusion isn't just a milestone for China, but potentially a truly global economic inflection point.
The Special Drawing Right (SDR), while largely a nominal instrument that weights the dollar, euro, pound sterling, yen, and now the yuan in a kind of composite tender for exchange-rate benchmarking and indexing purposes, still represents a key step for Beijing on its long march to parity with the developed market economies of the West, especially the US. Much like the first steps it took in the early 1980s to reintroduce market competition to the domestic socialist economy, it marks a starting point of genuine opening of the country's financial markets to international capital flows.
The mere fact that the yuan is actually being included at all - almost a year after the go-ahead was given - is a testament to the changing times. For a semi-market currency (at best) to join the ranks of mature market ones as a standard issue is an indication of how much the world at large needs China to eventually go where the SDR now says it should go, even if it's nowhere close to being there at the moment.
While Beijing now has an additional powerful impetus to push through financial reforms and liberalization, the hard realities of its present economic transition mean that the yuan is anything but ready for prime time just yet.
Significant capital outflow pressures remain, and equities in particular seem to be experiencing a lopsided imbalance with mainlanders' overseas investments absolutely swamping overseas investors' mainland investments.
On the other hand, yuan-denominated bond inflows have increased and this is an encouraging initial sign that the government and central bank's efforts to boost foreign purchases of yuan-denominated debt have borne some fruit already.
For good or ill, it seems that state policy and not private market participant demand will continue to dictate the yuan's degree of free and open international use for some time to come; even should capital controls be relaxed, this will probably only be a consequence of PBOC gaining enough confidence that its own surrogates (i.e. the large state banks) have enough "swing" clout on global RMB exchanges to sway the currency as Beijing pleases.
The increased use of RMB in global commodities trade, meanwhile, will be crucial to elevating the yuan's actual practical value as a medium of exchange in global commerce, to eventually challenge the dollar in this domain. The groundwork for such a tectonic long-term shift is being laid with the "Belt and Road" initiative, the AIIB, and other regional and global programs undertaken by Beijing to promote sustainable economic ties and links at a time when the West is confronted with the real prospect of being compelled by its own electoral politics to seal itself off and turn inward.
So the SDR inclusion isn't just a milestone for China, but potentially a truly global economic inflection point.
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