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Why the yuan will never be a true international currency

In August this year the yuan regained its position as the fifth most used currency for payment from the Canadian dollar, according to Swift data.

Business, October 3

And half the annual rainfall of Spain in centi-fathoms per square inch is equal to the average speed of a fleeing ground squirrel in furlongs per week.

Well, if we want to talk trivia, why not? Trivia is what I call Beijing’s obsession with the ranking of the yuan as a payment currency for international trade.

Let’s get some things straight. There are only two international currencies in the world and if you eliminate the internal trade of Fortress Europe as not entirely international then there is only the US dollar.

I cannot conceive of how the Canadian dollar is in any way an international currency. It is only used in Canada. If you somehow become the owner of a Canadian $100 bill, you take it to your bank and you say, “Can I have some real money for this, please, something that doesn’t just go down forever and ever?” (I speak from sad experience of Canadian investments)

It’s the same thing you say about the Australian dollar, of course, and for the same reason. The only reason either of these two is ever used for trade is that someone happened to have some to hand in a balance of payments anomaly and an in-country bank was slow to take the profit on conversion into US dollar.

Next, to this thing called “Swift”, the Society for Worldwide Interbank Financial Telecommunications, which handles a large proportion of international payment flows.

Swift only knows the purpose of the payments it handles when it is told what they are for and it is only told in international trade when they take the form of letters of credit – bank guarantees that trade payments will be made.

But banks charge stiff fees for this service, of course, and people do not generally opt for letter of credit if they trust their counterparties. I cannot imagine, for instance, that Apple pays its long-time suppliers in the mainland through letter of credit. It pays direct and saves the bank fees.

So how much of international trade is actually settled with letter of credit?

Your answer, from a recent study by two US Federal Reserve Board economists, is 12.5 per cent. Broken down further, about 36 per cent of the mainland’s imports and about 8 per cent of its exports run on letter of credit. You may call the difference between the two figures a trust gap.

And you now understand why I rate Swift rankings of international trade payments by currency as up there in significance with ground squirrel speed in furlongs per week.

Let’s take this a little further. In Sunday’s paper, my former colleague Tom Holland (time to return from your sabbatical, Tom) argued that the People’s Bank of China’s enthusiasm for yuan inclusion in the International Monetary Fund’s special drawing rights represents an attempt to force the pace of financial liberalisation.

I think he is right and the evidence increasingly suggests that the attempt is failing. The only real attraction that the yuan ever had abroad is that it generally rose against the US dollar for a multi-year period, thus offering holders a speculative profit.

But now it is generally declining against the US dollar and its fair weather friends are all fleeing. What did the PBOC really expect? What chance does it have of stopping this trend when exporters keep their export revenues abroad instead of investing them at home in more export industry?

I think there is in fact a distinct danger to this much ballyhooed inclusion of the yuan in the SDR. The IMF is now run by a French labour lawyer who wrecked France’s fiscal position as its finance minister and whom Greece has already defied on the IMF’s traditional insistence that its loans be repaid.

Expect more of the same over the next few years, I say. What we have here are the other prestigious sponsors of the SDR proclaiming, “So you want to join us in losing your money, Mr Xi? Oh, yes, please, be our guest.”