The case for Chinese Yuan
as an Alternate Currency
to the USD
Prepared by : Manoj Nathani
Oct 17, 2013
Change is the only constant
The change of power from US Dollar to Chinese Yuan is happening right now, therefore, either
one can sit idly and watch it happen or participate and profit from it.
Remember, nothing lasts forever.
Source: JPM, Hong Kong Monetary Authority, December 2011
Do you Renmibi?
Standard Chartered bank’s Research Team started a Renmibi (or CNY) Globalization Index (RGI) in Dec 2010 that has
increased by over 1,000% in just 3 years! This index measures the rate of globalization of CNY.
Do You Renmibi?...Cont’d
The following is paraphrased from the most recent research dated Oct 9, 2013 by Standard Chartered Bank:
The Renminbi is likely to be a big part of your business sooner than you think. If you trade with China, you’ll be invoicing in it,
paying it, and receiving it from your clients. If you operate in China, you will be issuing debt in Chinese yuan (CNY) and using
CNY instruments to hedge your FX and rates risk. If you are running a global portfolio, then the Renminbi
will – sooner or later – be a key part of your investment strategy, whether in FX, equity or
By 2020, we expect 28% of China’s international trade to be denominated in Renminbi, some USD 3tn a year.
By 2020, we believe the US dollar (USD), EUR and CNY FX and rates markets will dominate global financial markets. Daily CNY
FX turnover should grow from the current USD 120bn to exceed USD 500bn.
We expect China’s capital account to be ‘basically open’; i.e., open but with some Chinese characteristics, by 2020. Direct
investment will flow much more easily than today, with only large deals subject to approval requirements. Portfolio flows will
take place within significantly expanded QFII and QDII frameworks.
As the onshore capital markets become more accessible to offshore investors, the offshore market will also expand. We
anticipate that the offshore Renminbi debt market to grow 30% a year, and to be worth CNY 3tn (USD 500bn) by 2020.
We expect a cross-border Renminbi payment clearing system China International Payment System (CIPS) to be fully operational
by 2015. This will ensure global Renminbi liquidity.
We expect the Renminbi to be a basically freely floating currency, and SHIBOR to operate as China’s equivalent of the federal
funds target rate.
China tells US about a new
The article below appeared on Oct 13, 2013 in China’s official media to suggest that US should stay away from meddling in
foreign countries, stop attacking others, respect international law, be ready to prepare for a NEW INTERNATIONAL RESERVE
CURRENCY and embrace substantial financial reforms.
Commentary: U.S. fiscal failure warrants a de-Americanized world
English.news.cn 2013-10-13 09:57:25
By Xinhua writer Liu Chang
BEIJING, Oct. 13 (Xinhua) -- As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to
bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.
Emerging from the bloodshed of the Second World War as the world's most powerful nation, the United States has since then been trying to build a global empire by imposing a postwar
world order, fueling recovery in Europe, and encouraging regime-change in nations that it deems hardly Washington-friendly.
With its seemingly unrivaled economic and military might, the United States has declared that it has vital national interests to protect in nearly every corner of the globe, and been
habituated to meddling in the business of other countries and regions far away from its shores.
Meanwhile, the U.S. government has gone to all lengths to appear before the world as the one that claims the moral high ground, yet covertly doing things that are as audacious as
torturing prisoners of war, slaying civilians in drone attacks, and spying on world leaders.
Under what is known as the Pax-Americana, we fail to see a world where the United States is helping to defuse violence and conflicts, reduce poor and displaced population, and bring
about real, lasting peace.
Moreover, instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world
by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies.
As a result, the world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites, while bombings and killings have become virtually daily routines in
Iraq years after Washington claimed it has liberated its people from tyrannical rule.
Most recently, the cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations' tremendous
dollar assets in jeopardy and the international community highly agonized.
Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated, and a new world order should be put in place, according to which all
nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing.
To that end, several corner stones should be laid to underpin a de-Americanized world.
For starters, all nations need to hew to the basic principles of the international law, including respect for sovereignty, and keeping hands off domestic affairs of others.
Furthermore, the authority of the United Nations in handling global hotspot issues has to be recognized. That means no one has the right to wage any form of military action against
others without a UN mandate.
Apart from that, the world's financial system also has to embrace some substantial reforms.
The developing and emerging market economies need to have more say in major international financial institutions including the World Bank and the International Monetary Fund, so that
they could better reflect the transformations of the global economic and political landscape.
What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar, so
that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.
Of course, the purpose of promoting these changes is not to completely toss the United States aside, which is also impossible. Rather, it is to encourage Washington to play a much more
constructive role in addressing global affairs.
And among all options, it is suggested that the beltway politicians first begin with ending the pernicious impasse.
China’s GDP – The numbers
China’s GDP has grown from below USD 1 trillion in
Dec 1997 to well over USD 8.3 trillion in Dec 2012
(16 years, 8 times growth).
Dec 2012: USD 8.3 trillion (5.9 times growth in 1
decade, 196 times growth in 2 decades and 408
times growth in 3 decades)
Dec 2002: USD 1.4 trillion
Dec 1992: USD 422bn
Dec 1982: USD 203bn
China’s Per Capita GDP
Despite having a massive 1.35bn population, China’s per capita GDP has risen from USD 501 in 1985
to USD 1,504 in 1995, to USD 4,114 in 2005 & USD 9,233 in 2012. Since 1995, it’s an explosive 6.1
times growth! Per Capita rapid growth indicates long term sustainable & all inclusive growth which is
set to continue to rise in the years ahead.
Chinese Yuan is the only currency in the world to have appreciated continuously since
1994 with the insignificant exceptions in 2002, when it declined just by 0.0005 bps, and
in 1999 by 0.0006 bps. Prior to 1994, it did depreciate over the previous decade. Post
1994, appreciation is correlated to the 8 fold rise in China’s GDP which never happened
previously as fast, as well as the build up of it’s massive cash reserves.
China’s Trade Surplus
China’s trade surplus has been running above zero for decades but has significantly risen since
1994. It is above USD 20-25bn PER MONTH since 2006 until date. China did not have trade deficit
between 1990 to 2003 and then from 2004 until 2010 on a monthly basis! On an annual basis,
they have not had a deficit since 1990!!
Chart of China’s trade surplus (or current account surplus) since 1990.
China Foreign Exchange Reserves
China’s FX reserves are at a massive USD 3.66 trillion as of Sep 30, 2013. They were almost zero in 1996 and have risen
from USD 73bn in 1995 to USD 3.5 trillion today which is a growth of 47.9 times in just 18 years! With the continued
savings from the trade surplus of USD 240 to 300bn per annum, this growth is set to continue for many years to come.
China’s reserves are bigger than the annual GDP of Germany!, OR, equal to Canada and India’s GDP combined, OR,
Russia and Brazil’s GDP combined!
CNY as a global trade currency
In 1998, CNY was No. 30 globally as trade currency & declined to No. 35 in 2001. However, since 2004
it jumped to 29, then No. 20 in 2007 & No. 17 in 2010 & in 2013 it shot up to the Top 10 worldwide at
CNY is used for trade settlement more than SEK, NZD, RUB, HKD, NOK, SGD etc for the first time in
In comparison, INR has declined from No. 15 level worldwide in 2010 to No. 20 levels as it has been
previously at same 20 levels since the 1990’s.
Source: BIS: Sept 2013, Page 12: http://www.bis.org/publ/rpfx13fx.pdf
According to the same report, trading in CNY has jumped by over 300% in the last 3 years. Source:
Meanwhile, liquidity is getting ramped up into hundreds of billions of yuan in HK, Taiwan and
Singapore individually. http://www.chinadaily.com.cn/xinhua/2013-09-20/content_10155853.html
Chinese banks have been appointed clearing banks in Singapore (Feb 2013) and previously in Taiwan
(2012) and HK (2004). http://www.thechinatimes.com/online/2013/02/6605.html
All importers of Chinese goods are being asked to settle trade in CNY more strongly since 2012 across
Europe and USA.
It is estimated that by 2020, CNY will be the 4th largest global trade currency.
China’s CNY swap list of countries
for bilateral trade in CNY
The list of countries who have signed up with China to do bilateral trade in CNY instead of in USD are as follows:
Russia: Nov 2010: http://www.ibtimes.com/china-russia-currency-agreement-further-threatens-us-dollar-248338
Japan: Dec 2011: USD 10bn: http://www.china.org.cn/video/2011-12/28/content_24267618.htm
UAE: Jan 2012: USD 5.6bn : http://english.peopledaily.com.cn/90778/7709301.html
Australia:: March 2012: USD 31bn
Chile: June 2012: http://news.xinhuanet.com/english/china/2012-06/27/c_123334167.htm
UK: Feb 2013: http://www.bankofengland.co.uk/publications/Pages/news/2013/033.aspx
Brazil: March 2013: USD 30bn:
Singapore: March 2013: USD 48bn:
S. Korea: March 2013: USD 56.5bn:
France: April 2013: USD
China’s CNY swap list of countries
for bilateral trade in CNY - Cont’d
Taiwan: Aug 2013: USD 48bn:
Hungary: Sep 2013: USD 1.63bn: http://www.globaltimes.cn/content/810175.shtml#.Ulu_RRazuIk
Indonesia: Renewed Oct 2013: USD 17bn:
Total of 19 countries with deals of USD 320bn
This number is now at 25 countries including the ECB.
Latest deal done in Oct 2013 is with the ECB for USD 57bn:
Research done by BBVA Bank, HK branch: May 2013:
China Oil Consumption & Car
Not only has China become the largest importer of oil but it’s per capita consumption is growing very
rapidly which is a very solid sign of all inclusive industrial growth. Future growth is even higher:
China is now the largest oil importer: http://www.bbc.co.uk/news/business-24475934
This chart of per capita oil consumption shows massive growth (2.5 times) since 1994 when the real
exponential growth began in China.
China’s Bond Market
China does not need to issue any bonds or receive new funds from overseas due to its large cash reserves and
state owned banking system. However, for 3 main reasons they need to issue bonds:
1) to create a bond yield curve to allow for comparisons with other countries and assess market risks
2) to diversify risk from banking system and;
3) to allow foreign market participants to invest in Chinese companies through offshore USD & CNY bond
Resources to understand more about China’s bond markets:
Govt of China:
Private Institutional Investor from USA:
China & US 10 year bond yields :
Over the last 30 years since 1980’s, US bond yields have declined continuously until mid 2012. Since then, US 10 year
yields have started rising for factors such as US ratings downgrade, unusually low US interest rates plus the Govt’s inability
to function as the most recent cause in Oct 2013. Meanwhile, Chinese interest rates on the 10 year bonds have remained
stable since 2005 between 3% to 4%. US rates have wildly gyrated from 5% to 1.4% and now at 2.7% levels in Oct 2013
and expected to go over 3% shortly.
Such volatile movements in the US interest rates have created instability around the world and hence CNY has better
chances to show stability in the years ahead (and profitability in currency and bonds both unlike US currency and USD
denominated bonds). The US volatility is compounded by the lower ratings, high debt, high unemployment and the case for
higher interest rates in 2014 and 2015, than in 2012 or 2013.
China’s Sovereign Rating
The international ratings agencies have upgraded China continuously since 1999. As of today, the sovereign
rating of China is rated AA- by S&P Aa3 by Moody’s and A+ by Fitch.
12/16/2010 - Upgrade
07/31/2008 - Upgrade
07/27/2006 - Upgrade
07/20/2005 - Upgrade
02/18/2004 - Upgrade
07/20/1999 - Downgrade
05/14/1997 - Upgrade
12/07/1992 - Upgrade
China – World’s Largest Sovereign
According to ESADE, a non profit university based in Spain, China has now become the largest Sovereign
Wealth Fund in the world with USD 743bn in assets, leaving Norway as No. 2 and Abu Dhabi as No. 3:
A fascinating research study done by US-China Economic and Security Review Commission:
China has spent USD 40bn in just the US shale gas revolution:
China has set up a separate office in USA, just to acquire US assets in Private equity, real estate and
other assets to diversify away from US fixed income debt:
According to PwC, China will overtake US economy and become the largest in the world by 2017.
China : Infrastructure Spending
Roads, Railways, Airports, Ports, Nuclear Power are being built and trillions of yuan are being spent each year to
support the rise of China:
Nuclear Power: China had 7 nuclear plants in 2011 with production of 12.6m kW capacity, currently 13 are under
construction with 34m kW additional capacity. By 2020, it is expected to reach 58m kW and become the highest
nuclear power producer in the world.
Oil & Gas: Refining has grown since 2002 from 5.9 bpd to 11m bpd in 2011. There is a China-Kazakhastan & ChinaMyanmar pipeline under construction. China already has become the largest importer of oil beating USA in 2013.
Airports: China had 147 airports in 2007, 180 airports in 2011 and will reach 230 airports by 2015. In 2007
according to passenger volumes, there were just 10 airports with more than 10m passengers, in 2011 were 21.
Ports: Shanghai is the world’s busiest port and 2 more cities of Busan & Shenzen come in the Top 5 ports worldwide.
Railways: 40,000 kms of railway tracks shall be completed by 2015. Instead of completing 120,000 kms target by
2020, it will now be achieved by 2015.
Roads: Since 2000, annual growth of roads is at 16%. China has the second highest road network in the world of over
75,000 km. Highway plan is to build upto 83,000 by 2015.
Vehicles: total vehicles registered per year has grown from 40m vehicles in 2003 to over 160m vehicles in 2010.
China : Asian Infrastructure bank
In order to make itself grow strongly and create peace with neighbours, China needs to support its
neighbours. If neighbours are doing well, China will do even better by creating regional demand for goods
On Oct 3, 2013, while US debt default discussions were going on, and Obama skipped his APEC meeting in
Bali, Indonesia, China announced prior to the APEC meeting on Oct 7 and 8, 2013 that China would like to
create a regional infrastructure bank and this news was announced by the Chinese President himself.
This will create demand as well as more regional peace and the ultimate benefit would be more business
within the region and sharing of best practices while not relying on the western agencies for financial
support and creating infrastructure similar to being built across China!
According to McKinsey this is a USD 1 trillion opportunity in Asia:
Asian countries have reserves of USD 6 trillion to protect themselves from a US debt default and the crisis
in US is creating a strong reason for all Asian nations to come together and plan at the cost of US Dollar.
Under the Chiang Mai Initiative, the ASEAN countries including China have created a USD 240bn reserve
fund for currency swaps between themselves.
China – Some more statistics
China produces 10 times more steel than US does:
China does more than double the number of space missions than US. A dragon in space: China's space programme
can no longer be ignored
China is spending in cash to clean up pollution:
Military spending: While China and Russia are spending more, US is cutting military spending though it is still No.
1. China may exceed US military spending by 2025.
China produces 10 times more cement than the second largest producer (India) globally. USA used be No. 2 in
2001 behind China but has become No.3 in consumption after being overtaken by India.
China : Urbanization Trends
In China, since 2011 more people have migrated to live in urban centers than in rural areas for the first time
in their history. The urbanization focus is coming right from the top at the PM level. Over 51% of China’s
population now lives in cities.
China’s Urbanization drive:
Premier Li Keqiang Wants More Chinese in the Cities
China’s urbanization drive, according to McKinsey:
In fact, China has signed up agreements with EU to help them in sustainable urbanization:
A brilliant article by the New York Times in June 2013 on the massive move to urbanization in China on
the largest migration in the history of the world:
China’s Outward Investment Stock
Since 2004-2005 period, China’s outward foreign investment across the world has grown to a total of USD
424bn as on Dec 2012 from a tiny USD 50bn in 2005.
China’s Global Acquisition Spree
China has been acquiring major assets overseas since 2005. China has spent over USD 386bn in acquisitions and USD 219bn in
In 2012, Chinese outbound investment set new records both in the U.S. and around the world.
Chinese secure foreign oil in $100B buying spree:
According to World Resources Institute, Washington, USA, “due to the country’s unprecedented economic growth, China’s
overseas investments have increased exponentially in recent years. Between 2009 and 2010, two Chinese state-owned banks
lent more money to other developing nations than the World Bank did. In fact, between 2002 and 2011, China’s outward foreign
direct investment (OFDI) stock grew from $29 billion to more than $424 billion.”
China's ambitious plans for its huge reserves
China’s foreign oil drive set to continue
China’s Mission Of Acquisitions
China's investment in Africa increases 20.5 pct annually
Internationalization of CNY
Isn’t it wise to enter into CNY before it becomes more international in scope?
Experts believe internationalization may happen over the next 15 years:
Future International Monetary Order:
Harvard Kennedy School on Navigating the rise of China’s currency:
The New Financial Free Zone that allows liberalization of currency experiments:
Research from DBS bank, Singapore suggests that it is a good sign that Onshore deregulation (creating a free zone) is happening for CNY
with offshore expansion (creation of overseas swap agreements and overseas settlement banks)
(Please copy and paste this link)
China – Africa trade rising:
Even the Bundesbank (Central Bank) of Germany agrees that the future reserve currency may be CNY:
German Chancellor Angela Merkel has already signed agreements to trade with China in Yuan instead of USD since Aug 2012:
Petro Yuan – Oil Trading in CNY
It may come as a shock to many that CNY has already started trading oil in the Chinese currency since 2012!
The above decision was one of the most important decisions that China has made and was a major historical point in
Nov 2012 and then in Apr 2013.
If oil is traded in a certain currency, then any country who buys oil must have that currency, which is facilitated by an
oil exchange, that creates huge demand for that currency and large holdings of that currency globally. This is one of
the important reasons why oil has been traded by OPEC/Saudi Arabia since the time oil was found in the Middle East
in USD and this agreement was signed by OPEC in 1973 by Henry Kissinger and Richard Nixon with Saudi Arabia.
Beijing Petroleum Exchange starts fuel oil spot trading in Nov 2012:
New spot trading platform to enhance influence in Apr 2013:
China has been buying Iranian oil since May 2012 in CNY:
Russia and China have already agreed since 2011 to trade in rubles and yuan instead of USD.
Renmibizing the US Dollar?
According to this excellent research by DBS Bank, Singapore, which I completely agree with, China is NOT
worried about its USD bond holdings of USD 1.3 trillion but more about havoc in its CNY.
(Please copy and paste this link)
This is the single biggest reason that China is insisting on more business persons worldwide using the CNY
instead of USD, because this further stabilizes the CNY. As we have seen earlier, CNY is being used by
almost 25 countries (and growing) in their trade with China.
Various countries want to be international centres of finance and have local CNY settlement which also
China is gradually allowing HK, Singapore, Taiwan and now London. Banks in NY and Dubai, Toronto and
Frankfurt are also allowed to let business clients hold CNY for trade purposes if the country has signed CNY
swap agreement with the Chinese Central Bank else a Chinese bank with presence in a country can facilitate
Hot News : Oct 15, 2013
First offshore centre outside of HK is
Entire countries are lining up outside China to ensure they get access to the lucrative CNY business.
On Oct 15, 2013, during a visit by the Chancellor of UK Treasury and the Mayor of London jointly, it was
announced that London will become the first offshore centre among the western countries who will be
allowed to invest in MAINLAND CHINA in various securities as well as most likely issue the first CNY bond of
the largest bank in the world – ICBC from their onshore China Head Office rather than from their offshore HK
branch. This will allow investors access to CNY while having accounts in London. The limit is only USD
13.1bn and mostly will be restricted to a select few banks whose names are yet unknown.
In return, UK will allow Chinese banks to open offices in UK with less restrictions.
London to be next offshore centre for renminbi
China : Further Reforms
In November 2013, the first Party Meeting will be held after the election of the new President Ji Xinping in
March 2013. This is expected to be a major announcement platform and shall be used to create reforms in
3 major areas for the next 5 year plan:
1. Anti-corruption Measures
2. Economic Reforms
3. Local Govt. reform to reduce their intervention powers
‘Diamond decade’ in sight if problems tackled
Based on the data provided in the slides previously, it is important to understand the various steps that China has taken over the
years and its rapid overall growth including articles from the China’s political elite proposing for change in the global financial
system. This is mainly due to political issues in US, Govt shutdown and the fact that US is no longer AAA nor a risk free country.
The strong GDP and cash reserves provide a strong backbone to the Chinese economy and this is truly reflected in the strength of
their currency, regardless of the impact of the global financial crisis worldwide.
China’s exports continue to rise, their GDP continues to add over USD 500bn per annum, their cash reserves continue to rise,
trade settlements in yuan keep rising, more countries keep getting approvals for yuan settlement and it’s global military and
economic clout keeps rising.
The currency has had no setback whatsoever since 1994 & has had an unprecedented straight line growth ever since.
China has created bond markets & equity markets for the foreign investors. Latest step being the launch of a free trade zone in
Shanghai in Oct 2013 where CNY can be traded or held without any restrictions and allowing London to become a global yuan
trading/settlement/investment centre similar to HK and Singapore.
We are still some years away from full convertibility in order to allow for free flow of money mostly outward but also inward into
China. Internationalization of any currency has to be done in baby steps so that it does not explode & fails.
Holding CNY and investing in its bonds and just the currency itself before it becomes important every single day is a must for
any portfolio, subject to the country being authorised by China to settle CNY for cash, deposits or bonds.
Selective banks only in Singapore & HK are allowed by China to hold CNY for clients & place as cash, deposits or bonds. Stocks
may be invested either via HK listed shares or via mutual funds in USD or CNY from Singapore or HK only thus far.
For any questions or comments, please do not hesitate to contact:
Principal Advisor & Founder
OAKTREE Management Consulting JLT
P O. Box 34560, Dubai, UAE
Mobile: +971 50 5584 871
Tel: +971 4 4508 684
Office 307, X-3 Tower, Cluster X, JLT, Dubai, UAE
This report is prepared solely for knowledge purposes and does not constitute any form of investment advice
and should not be construed as an advertisement, solicitation, invitation, representation or inducement to
buy or sell securities in any jurisdiction. Readers should make their own investment decisions or seek
appropriate professional advice.