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Preparing China's yuan for the world stage
Angling for a greater role on the world financial stage, China experiments with currency convertibility - in Hong Kong.
HONG KONG (Fortune) -- President Barack Obama's visit to China this week has increased the spotlight on one of the top hot-button issues in U.S.-China relations: revaluing the Chinese currency.
The U.S. Treasury, European officials, and international finance types have called for China to let the value of the yuan rise against the U.S. dollar, hoping Obama will keep pressuring the resistant Chinese.
Yet what's little known in the U.S. is that China already has underway a unique experiment with floating the yuan -- in Hong Kong. There, the former British trading colony, now under Chinese sovereignty, is the testing ground for moves to ultimately let the yuan float as a freely convertible currency.
China has kept a modern version of the Great Wall around the yuan -- also known as the RMB (which stands for renminbi, or "the people's money") -- since the Communists came to power in 1949. China has fixed the value of its currency at 6.83 to the dollar since July 2008, after allowing it to rise 21% in the previous three years.
The yuan's lack of convertibility on world markets has insulated China from the devastating tsunamis of international capital flows, such as those that hammered its free-market neighbors in the Asian Financial Crisis of 1997-98, as well as in 2008.
But now, as China seeks a greater role on the world financial stage -- including its official pronouncement to make Shanghai a financial center that can compete with London and New York by 2020 -- it recognizes the need for an internationally accepted currency.
In fact, China's central bank governor has been championing a move away from a dollar-centric world. So the Chinese government has been moving to allow banks in Hong Kong to issue bonds, hold deposits, and settle trade with the mainland -- all in RMB.
"If this experiment goes well, it will hasten the pace toward convertibility," says Julia Leung, Hong Kong's undersecretary for Financial Services and the Treasury, who is charged with implementing the convertibility regulations in conjunction with Chinese government officials. "The currency is more or less already convertible in Hong Kong. This is a good way of testing international demand."
Although China has set no official timetable, financial analysts now look to that 2020 date for full convertibility. But it may come sooner -- as soon as China feels it has sufficiently worked out any bugs, as well as liberalized its domestic economy to the extent that the system can handle external shocks.
"Once they have the mechanisms, the machinery, and the infrastructure in place, then they can scale up very quickly," says Enoch Fung, an economist with Goldman Sachs. "This is new, uncharted territory. We can make all the mistakes here, and we will."
Since China began this experiment by approving RMB bond offerings in 2007, banks with branches in mainland China have issued a total worth $5.6 billion in various tranches.
"They've been snapped up," says Shaun Wallis, global head of business management for HSBC, which, like most of the issuing banks, found its second bond offering, this September, oversubscribed by a factor of three to four. "Transactions are beginning to gather some momentum."
However, this June's announcement to allow settlements of international trade denominated in RMB has found a more muted international response. Just $6.3 million worth of trade was settled in the first month.
RMB watchers cite technical teething problems -- and the fact that only 365 companies in four Chinese cities were allowed to participate after going through a vetting process by the Chinese government.
Yet HSBC predicts that within five years, around half of China's cross-border trade will be settled in RMB instead of U.S. dollars, making the yuan one of the top three international currencies in the world. And in September, HSBC announced plans to move its CEO from London to Hong Kong, as "the center of economic gravity" shifts from West to East.
"It's just like the euro," says Wallis. "There were many skeptics when the euro came about. It's now a very large currency around the world. It's the same with the RMB."
To make that true, China needs to further expand the number of companies eligible to participate in trade settlements, as well as begin to allow trade financing. Hong Kong officials are confident that will happen soon enough.
"For the long-term prospect, we're very optimistic," says Peter Pang, deputy chief executive of the Hong Kong Monetary Authority, the equivalent of the central bank. "The demand to increase the use of the RMB as a settlement for trade is tremendous. Hong Kong will benefit in a very big way ... hopefully as the trade settlement hub for the whole region, between Southeast Asian countries and China."
In part, China is merely trying to catch up with demand. Shops in Hong Kong freely accept RMB for purchases, and money-changing booths do a booming cash business. Local Hong Kong media have reported suitcases of RMB flooding over the border from China each day, some to buy property in cash.
That -- along with the IPOs of eight mainland companies in Hong Kong totaling $2.1 billion in the first half of the year -- has fueled a 40% rise in the luxury property market since January. And fears of a bubble have risen, too.
Last month, the highest-priced real estate in the world sold for $57 million -- or nearly $10,000 per square foot -- in Hong Kong to a mainland Chinese in the Mid-levels district.
CCTV, China's state-run television network, reports that customs officers confiscate at least two illegal cash transports, totaling as much as 400,000 yuan, at the border each day. But that doesn't reflect how much is getting through.
"You can't stop it," says Undersecretary Leung, "so you need to find a way to regulate it and monitor it through the banking system so that you can have better control."
But banks in Hong Kong have attracted just 1% of total deposits in yuan so far -- or 58 billion RMB -- in 1.2 million accounts. That's in part due to restrictions on how much money can be exchanged per day and the fact that bank accounts are restricted to individual depositors, not institutions. A cap remains at converting 20,000 RMB per day, but HSBC and other banks offer daily automated exchanges for depositors who request it.
Still, RMB deposits grew nearly 3% in September from the previous month and are expected to continue rising as China indicates flexibility on increasing the value of the RMB against the dollar. The Hong Kong dollar has remained pegged to the U.S. dollar for 28 years, but Fung of Goldman Sachs thinks it's only a matter of time before the Chinese decide to peg it to the yuan instead.
"Once China opens its capital account, this place will be flooded with RMB," says Fung, though he gives no time table (nor does the Hong Kong Monetary Authority's Pang give any indication of flexibility).
"We're all hoping the big bang will come," says Sir David K.P. Li, the chairman of the Bank of East Asia, the largest independent local bank in Hong Kong, which has issued $4 billion in RMB bonds. But China's recent moves are designed to smooth out the kinks --so that when the day of full convertibility arrives, it won't come with a bang, but rather a whisper.
Bernanke: Weak recovery ahead
Fed chairman said high unemployment and tight credit will limit economic growth, but he dismissed worries about another recession and dollar weakness.
NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said the recovery in the U.S. economy will be modest, with higher than desired levels of unemployment for the foreseeable future.
Speaking to the Economic Club of New York Monday, Bernanke said in his prepared remarks that financial conditions are significantly better than when he spoke to the club a year ago at the height of the crisis in global financial markets.
But Bernanke cautioned that "some important headwinds -- in particular, constrained bank lending and a weak job market -- will likely prevent the expansion from being as robust as we would hope."
He didn't offer much immediate hope of a better labor market in the United States either.
"Jobs are likely to remain scarce for some time, keeping households cautious about spending," he cautioned.
The latest Labor Department report showed unemployment hit 10.2% in October, the first time it has been in the double digits in 26 years. Employers trimmed 190,000 jobs from payrolls, the 22nd straight month of job losses.
"The best thing we can say about the labor market right now is that it may be getting worse more slowly," he said, adding that he didn't hold out much immediate hope for an immediate turnaround.
"The unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect," he said.
2010 Job forecast: Small raises
In response to a question from the audience, Bernanke said he doesn't see the same kind of jobless recovery in 2010 that the economy went through following the 2001 recession, in which job losses continued for nearly two years after growth returned. But he did say that he's worried job growth will be so meager next year that it won't make a dent in the unemployment rate.
Bernanke also said credit for small businesses and consumers is likely to remain strained. And he said that tighter credit will be a significant drag on the economy going forward.
But Bernanke said in his remarks that he did not agree with economists who are worried the economy will fall into recession once again next year.
"My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely," he said.
In addition, Bernanke said that the Fed is monitoring the recent declines in the value of the dollar, but he suggested that much of the weakness was due more to diminishing fears about a global financial crisis.
"When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar," he said.
Bernanke added that with the better conditions in markets in recent months, "these safe haven flows have abated, and the dollar has accordingly retraced its gains."
Need to end 'to big to fail'
Bernanke spent part of a question-and-answer period talking about banks and Wall Street firms being "too big to fail" and the problem of valuing assets on their balance sheets.
He said he hoped that the "too big to fail" doctrine that led to the bailout of major banks and Wall Street firms following the bankruptcy of Lehman Brothers needed to become a "relic" in the future, but that could only happen through the creation of new procedures for closing such firms in a more orderly manner.
"We need to have some alternative to bankruptcy or bailout," he said. "We need to have another way to close firms that come to the brink of failure without destroying the rest of the system."
Bernanke said that he doesn't endorse rolling back the 1999 law that allowed commercial banks to engage in Wall Street trading and investment banking. He said he doubts keeping those restrictions in place would have prevented the crisis in financial markets.
"I don't think simply making banks smaller is going to do it," he said when asked about how to get rid of the reality of "too big to fail."
"Banks can still be systemically critical, even if they're somewhat smaller," he added. He also said that large bank failures are not the only threat to the economy.
"After all, in the 1930s we didn't have too many large bank failures, but we had thousands of small bank failures," he said.
But he said that in the future, regulators of major firms needed to be able to place curbs on banks engaging in trading or investment banking activities on a case-by-case basis.
A year ago Bernanke told the same gathering that what he most wanted was to know what all the so-called toxic assets on major financial firms' balance sheets were worth. Monday he said despite improvements made in judging the value of assets in the last year, "I'd still like to know what the stuff is worth."
$600 million spent to influence health care debate
Health care reform has turned into the costliest single legislative issue yet. More than $600 million has been spent on lobbying, campaign contributions and TV ads.
WASHINGTON (CNNMoney.com) -- The price tag to influence the health care debate in the halls of Congress has surpassed $600 million and is fast becoming a legislative record breaker.
Reaching beyond the half-billion mark, the total spent on lobbyists, television ads and political donations is enough to pay the insurance tab for about 45,000 families a year.
A third of that spending, $200 million, was raised and spent just in the past few months, as Congress has been more thoroughly ensconced in policy debates about public insurance options and taxpayer-funded abortions.
Senate Democrats are expected to unveil their official health care bill as soon as Wednesday, and debate it in December and vote by the year's end.
The big spenders range from drug companies, hospitals and doctor groups to organizations that advocate for unions, immigrants and retirees.
Lobbying: Lobbying continues to account for the largest chunk, with health care industry spending just shy of $400 million through Oct. 26, according to the Center for Responsive Politics.
"The health sector is on pace to spend more money than it ever has before," Dave Levinthal of the Center for Responsive Politics, which analyzes and collects lobbying and campaign spending figures. "Its spending obliterates its totals from previous years."
Health industry executives say that their spending is necessary, given what's at stake. It's also guaranteed by the Constitution.
"We're reforming one-sixth of the economy with an issue that effects every individual and employer across the country," said Robert Zirkelbach, spokesman for America's Health Insurance Plans, a group fighting against a public insurance option. "Sometimes that point gets missed in this debate."
Lobbying by drug companies accounted for nearly half of all health sector lobbying. Among other issues, the pharmaceutical industry is keen on making sure that the government doesn't start allowing imports of cheaper prescriptions from Canada or Mexico.
"We are doing everything possible to make comprehensive health care reform a reality this year," said Ken Johnson, senior vice president of the trade group PhRMA. "It will benefit patients, the economy and the future of our nation. There's a lot at stake right now."
The lobbying figure doesn't include lobbying by the Chamber of Commerce ($65 million) or AARP ($15 million), groups that have lobbied on health care, as well as other bills, including financial regulatory reform.
Other heavy hitters among health sector lobbying include hospitals and nursing homes ($77 million) and doctors and other health professionals ($59 million).
Television advertising: Spending on TV ads by health care interests is the next major record-breaking category - topping $165.7 million through Monday, according to the Campaign Media Analysis Group.
"This is far and away the most we've seen spent," said said Evan Tracey, president of the the media research group, which also consults for CNN. "There's certainly no comparison that comes right to mind."
Over the past month, opponents have spent $23 million in ads opposing health care reform while supporters have spent $11 million.
TV ads had been more focused on policy issues, such as calls for insurance coverage for tests that detect autism. But now ads are starting to transition into focusing on politics, with attacks on lawmakers who vote for or against health care reform. That means even more will be spent in coming months, as ads begin running in media markets with competitive congressional races, Tracey said.
Health care professionals and companies have plunked down $38 million to fund 2010 candidates for federal office, according to the Center for Responsive Politics. Some $95 million was raised during the 2008 cycle.
Top spending sectors include health professionals ($13 million), drug makers ($5 million) and hospitals and nursing homes ($4 million). Top recipients were Senate Majority Leader Harry Reid, D-Nev., Sen. Charles Schumer, D-N.Y., and Sen. Richard Burr, R-N.C.
Are Chinese exports good for America?
President Obama said better relations with China could help China and the U.S., but critics see little good from a widening trade gap.
NEW YORK (CNNMoney.com) -- As President Obama completes his trip to China, it's a natural time to ask if trade with the greatest source of U.S. imports is a good thing or bad thing for the still battered U.S. economy
Obama said he spoke to Chinese President Hu Jintao about the need for more balanced trade between the two major trading partners. He also urged China to allow the Chinese yuan to gain value against the dollar.
But he also told an audience of students in Shanghai this week that increased trade between the two nations is good for both countries, despite some friction between the two governments. And Obama said he hoped that trade will continue to grow.
"This trade could create even more jobs on both sides of the Pacific, while allowing our people to enjoy a better quality of life," Obama said.
But there are plenty of critics who believe that nothing good comes out of the U.S. trade gap with China, which so far this year has dwarfed the combined gap with the rest of the world by more than a third.
"I think the U.S.-China relationship was the worst economic policy mistake of the last generation," said Scott Paul, executive director of Alliance for American Manufacturing, a coalition of small-to-mid-size manufacturers and some unions which has been a long-time critic of U.S. trade policy.
Paul and other critics argue currency manipulation by the Chinese to undervalue their currency, government subsidies to Chinese manufacturers and low wages paid to Chinese workers have put U.S. workers at an unfair disadvantage.
The Economic Policy Institute, a liberal think tank, estimates that 2.3 million U.S. jobs were lost between 2001 and 2007 due to the Chinese trade gap.
University of Maryland professor Peter Morici has written that this trade gap "threatens to torpedo the economic recovery and keep unemployment above 10 percent for the foreseeable future."
But others argue that even if there needs to be some changes in U.S.-China trade policy, the U.S. economy benefits more than it is damaged by the relationship.
Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, said that there is little evidence to support that trade gaps lead to big increases in job losses.
"If it was a cause of unemployment, why wasn't unemployment rising from the late 90's all the way through to today as Chinese imports rose," he said.
Jay Bryson, global economist with Wells Fargo Securities, added that even though the growing trade gap has caused some harm to the U.S. economy, there are plusses that should not be overlooked.
"It doesn't mean that every person in the United States benefits, but from a national perspective it's a positive," said Bryson.
Bryson and Hufbauer both said that lower priced Chinese goods reduces the cost of living for American consumers, giving them more money to spend on other goods and services.
Bryson said limiting Chinese imports through tariffs or other barriers would raise the price of those goods.
"While it would protect the jobs of some people making toys or shirts here, it would cost other jobs because we wouldn't have the money to spend on other goods and services," Bryson said. "If I'm spending more on toys for my kids or my shirts, I have less money to go to the movies or go out to a restaurant."
Hufbauer conceded that the Chinese yuan is grossly undervalued. But he said there is reason to hope for some change on that front.
China has pegged its yuan to the dollar, rather than letting it trade freely like other currencies. So it has been declining as the dollar has lost value in recent months.
The decline in the yuan means that other countries in Asia and Europe are starting to pressure Chinese leaders to allow their currency to trade more freely. And strong economic growth in China, coupled with the declining dollar, is creating inflation risks for China.
So the Chinese may start to relent on the yuan due to their own self interest, rather than American pressure.
"Once there is some evidence the global recovery is more sustainable, the Chinese worries about inflation are likely to mean they'll allow [the yuan] to appreciate versus the dollar," said Bryson.
Are Chinese exports good for America?
President Obama said better relations with China could help China and the U.S., but critics see little good from a widening trade gap.
NEW YORK (CNNMoney.com) -- As President Obama completes his trip to China, it's a natural time to ask if trade with the greatest source of U.S. imports is a good thing or bad thing for the still battered U.S. economy
Obama said he spoke to Chinese President Hu Jintao about the need for more balanced trade between the two major trading partners. He also urged China to allow the Chinese yuan to gain value against the dollar.
But he also told an audience of students in Shanghai this week that increased trade between the two nations is good for both countries, despite some friction between the two governments. And Obama said he hoped that trade will continue to grow.
"This trade could create even more jobs on both sides of the Pacific, while allowing our people to enjoy a better quality of life," Obama said.
But there are plenty of critics who believe that nothing good comes out of the U.S. trade gap with China, which so far this year has dwarfed the combined gap with the rest of the world by more than a third.
"I think the U.S.-China relationship was the worst economic policy mistake of the last generation," said Scott Paul, executive director of Alliance for American Manufacturing, a coalition of small-to-mid-size manufacturers and some unions which has been a long-time critic of U.S. trade policy.
Paul and other critics argue currency manipulation by the Chinese to undervalue their currency, government subsidies to Chinese manufacturers and low wages paid to Chinese workers have put U.S. workers at an unfair disadvantage.
The Economic Policy Institute, a liberal think tank, estimates that 2.3 million U.S. jobs were lost between 2001 and 2007 due to the Chinese trade gap.
University of Maryland professor Peter Morici has written that this trade gap "threatens to torpedo the economic recovery and keep unemployment above 10 percent for the foreseeable future."
But others argue that even if there needs to be some changes in U.S.-China trade policy, the U.S. economy benefits more than it is damaged by the relationship.
Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, said that there is little evidence to support that trade gaps lead to big increases in job losses.
"If it was a cause of unemployment, why wasn't unemployment rising from the late 90's all the way through to today as Chinese imports rose," he said.
Jay Bryson, global economist with Wells Fargo Securities, added that even though the growing trade gap has caused some harm to the U.S. economy, there are plusses that should not be overlooked.
"It doesn't mean that every person in the United States benefits, but from a national perspective it's a positive," said Bryson.
Bryson and Hufbauer both said that lower priced Chinese goods reduces the cost of living for American consumers, giving them more money to spend on other goods and services.
Bryson said limiting Chinese imports through tariffs or other barriers would raise the price of those goods.
"While it would protect the jobs of some people making toys or shirts here, it would cost other jobs because we wouldn't have the money to spend on other goods and services," Bryson said. "If I'm spending more on toys for my kids or my shirts, I have less money to go to the movies or go out to a restaurant."
Hufbauer conceded that the Chinese yuan is grossly undervalued. But he said there is reason to hope for some change on that front.
China has pegged its yuan to the dollar, rather than letting it trade freely like other currencies. So it has been declining as the dollar has lost value in recent months.
The decline in the yuan means that other countries in Asia and Europe are starting to pressure Chinese leaders to allow their currency to trade more freely. And strong economic growth in China, coupled with the declining dollar, is creating inflation risks for China.
So the Chinese may start to relent on the yuan due to their own self interest, rather than American pressure.
"Once there is some evidence the global recovery is more sustainable, the Chinese worries about inflation are likely to mean they'll allow [the yuan] to appreciate versus the dollar," said Bryson