The internationalization of Yuan and the role of the Euro
- By Nicola Casarini
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E-mail China.org.cn, January 9, 2014
Far from being a one-sided process, some Eurozone governments and EU institutions have courted and welcomed Chinese engagement, setting in motion an active monetary diplomacy. Since its establishment in May 2010, the European Financial Stability Facility (EFSF) – replaced in October 2012 by the European Stability Mechanism (ESM) – has actively sought Beijing’s support, obtaining concrete pledges for the purchase of Portuguese, Irish and Greek bailout bonds auctioned by the EFSF/ESM €440 billion rescue fund. Moreover, China has already showed an interest in investing in fully guaranteed and safe euro bonds. This reflects China’s growing optimism vis-à-vis the euro, in particular after Mario Draghi’s declaration in July 2012 that the ECB will do ‘whatever it takes’ to preserve the Eurozone.
Shanghai-Frankfurt monetary axis
By signing their first bilateral currency swap agreement in October 2013, the PBOC and the EBC have cemented a relationship bound to grow in the next years. It is no coincidence that the swap agreement occurred only a few weeks after the official launch of the Shanghai FTZ. The process leading to the internationalization of the renminbi takes place, in fact, in an international monetary environment which has already experienced the emergence of an alternative to the dollar.
The euro is today the world’s second most important reserve currency: by the end of 2013, euro-denominated assets accounted, on average, for around 25-27% of the holdings of the world’s major Central Banks, reaching around one-third in China. The Frankfurt-based European Central Bank is only second to the Fed in terms of assets.
Alongside the euro, there has also been an upsurge in the use of the renminbi. The latter is today the world’s second most used trade finance currency. Since 2009, the PBOC has signed currency swaps agreements with numerous Central Banks around the world. The Shanghai FTZ is but the latest development of a process aimed at the full convertibility of the Chinese currency.
The euro benefits from Chinese support. The internationalization of the renminbi takes advantage from the existence of the European common currency. There is thus a new monetary axis emerging between the Shanghai FTZ – and the Frankfurt-based ECB likely to have significant implications for the dollar.
This new axis is both complementary – and alternative - to Washington-Beijing relations. Hopefully, policy makers from the world’s three largest economies – EU, US, China – will be able to create the conditions for the smooth emergence of an international monetary order where the dollar, the euro and the renmimbi would each have its proper place.
Nicola Casarini is Senior Analyst at the Paris-based European Union Institute for Security Studies (EUISS) and the author of Remaking Global Order: The Evolution of Europe-China Relations and its Implications for East Asia and the United States (Oxford University Press).
This article was first published at Chinausfocus.com To see the original please visit http://www.chinausfocus.com/finance-economy/the-internationalization-of-the-renminbi-and-the-role-of-the-euro/
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