Je Suis Monsieur Yuan

By Amr Dabbous on January 29, 2015

As business, political and academic leaders from around the world gathered in Davos, Switzerland last week to discuss their 2015 global agendas, another
Chinese major deal was struck behind the scenes. Zhou Xiaochuan (also known as Mr. Renminbi), governor of the Peoples Bank of China (PBC), and
Thomas Jordan, Chairman of the Swiss National Bank (SNB) signed an MoU to establish a trading center for the Chinese currency in Zurich. As per the
agreement, the Chinese central bank will grant its Swiss counterpart a 50-billion Yuan quota (US $8 billion) under its Renminbi Qualified Foreign Institutional
Investor (RQFII) program, launched by Mr. Xiaochuan in 2011. This is an attempt to understand this momentous deal in its proper context in order to unveil
its global implications.

In December 2002, Mr. Xiaochuan became the 11th Governor of the Peoples Bank of China in what eventually proved to be one of the smartest designations
in the countrys modern history. Remember the time when everything around you started reading Made in China? This was the man behind it! So what
exactly did he do that no one else was able to match or copy?
One month prior to Mr. Xiaochuans appointment, China had introduced the Qualified Foreign Institutional Investor (QFII) program in a first step to
internationalize its currency, officially called the Renminbi and more frequently known as the Yuan. Under the QFII program, qualified foreign investors
were allowed to buy Renminbi-denominated A-shares in both the Shanghai and Shenzhen stock exchanges. Obviously, all foreign currencies had to be
converted to Yuan for settlement.
Then in 2005, Mr. Renminbi took a major step in internationalizing the currency, when he reformed the countrys foreign exchange system. The Yuans peg
to the US Dollar, which dated back to 1994, was replaced by a peg against a basket of currencies, while being allowed to float within a reasonable range.
At the same time, a 2% increase in the currencys rate against the dollar was instantly adopted. Eventually, the Yuan was allowed to appreciate by another
16% before the peg to the US Dollar was temporarily reinstated during the international financial crisis. Two years later, the peg was removed once again as
the Yuan gained another 12% against the US Dollar.
The higher Yuan kept Chinese inflation at bay and prevented capital outflows from the country. As a result, Mr. Xiaochuan took his countrys exports from
as low as $313 billion in 2002, to as high as $2.2 trillion by 2013. Before he took charge, Chinas exports were growing at average rate of 10% annually.
Eleven years down the road, the countrys exports have been consistently growing at a 20% average rate except in 2009, when it went negative due to the
international financial crisis.
In July 2009, Mr. Xiaochuan launched another pilot program allowing five Chinese cities to settle their cross-border trades in Renminbi. Before this date, the
Chinese currency was not allowed outside Chinas borders; it was simply illegal! The decision meant that a parallel currency, the Offshore Renminbi, could
free float outside the country and outside of Chinas control, while the local currency remains under Mr. Xiaochuans supervision. A year later, the pilot
program was expanded to include 20 Chinese provinces, before being extended to cover the whole country by August 2011 as the whole world was now
allowed to settle trades with China in Yuan.
Then came the big moment, when Mr. Xiaochuan announced the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme in December 2011. The
new program allowed qualified jurisdictions Hong Kong being the first to buy not just domestic Chinese shares but also Chinese bonds with Offshore
Yuan! Now fund managers in those qualified jurisdictions do not have to worry about their currency exposure in China anymore. However, there still remained

one obstacle. These jurisdictions needed to accept the new program and implement it locally, before any such transactions take place. The challenge was that
by doing so, every single jurisdiction would be officially accepting the Chinese Yuan as an international currency, so did they?
In 2012, Taiwan implemented the program; no big deal, who else would have followed Hong Kong? In 2013, Singapore joined the club; well, this is no
internationalization by any means. Now watch this! In 2014, the UK, Germany, South Korea, France, Luxembourg, Qatar, Canada and Australia implemented
the program. And if you think that its still too early for Mr. Xiaochuan to strike any deals in 2015, let it be known that he has already subscribed Thailand
and Malaysia earlier this month, and as you already know, Switzerland just signed in Davos!
I know the media is full of strictures on Chinas policies, but who cared to report that the Chinese currency now ranks second behind the US Dollar as a global
financing currency as reported by Swift, the international currency clearing system? How many cared to report that the Yuan surpassed 11 world currencies
in just two years to become the fifth most used currency in global trade in December 2014? Make no mistake about it, this is the worlds next reserve currency,
so dont put all your eggs in the US Dollar. Period!
Note: This is by no means an invitation to sell the US Dollar against the Yuan actually the Chinese currency is expected to depreciate in the near-term
against the Dollar , its rather an advice to get ready.
2015 Amr Dabbous & eTradingPicks.com. All Rights reserved.
Amr Dabbous is a prominent MENA economist and analyst. He is the author of two investment books and publisher of the quarterly "Top Picks Report",
where he forecasts the next best investment opportunities in equities, currencies and commodities! Get it FREE here: http://www.etradingpicks.com/toppicks-report/
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