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s 4 hu also appeared to push back against reformers calls to reduce the role of the state sector in china s economy instead he insisted china would unswervingly adhere to the basic economic system in which public ownership is the mainstay and economic entities of diverse ownership develop together and said the party and government should steadily enhance the vitality of the state owned sector of the economy and its capacity to leverage and influence the economy his stance appeared to run contrary to the prescriptions in the world bank report issued earlier this year in conjunction with top chinese policy makers which appeared to have the support of hu s protegé premier in waiting li keqiang and had raised hopes that positive reforms might take place after the leadership transition we ll have to wait to see what if anything the new rhetoric means for actual policy 2 comments from china economy market reform political reform politics sinica podcast party congress preview october 27 2012 tags arctic bo xilai bob reiss communist party jamil anderlini jeremy goldkorn john garnaut kaiser kuo leadership transition melting ice cap party congress shale gas sinica podcast southern tour the eskimo and the oil man wen jiabao you know you ve hit the big time in china when you re invited as a guest on kaiser kuo s sinica podcast this week i joined kaiser s co host jeremy goldkorn of danwei com for a discussion about china s upcoming leadership transition i really recommend listening to the 45 minute session not so much for my own comments which will be familiar to anyone who regularly reads this blog but for the great stories and insights from my two fellow guests john garnaut of the sydney morning herald and jamil anderlini of the financial times both of whom have just published brand new books on the bo xilai scandal you can listen to the podcast here or download it here while you are listening i highly suggest you check out the provided links including the china economic review article i wrote in 2010 and mentioned in the podcast on why china needs a new southern tour as well as the primer on china s leadership transition i wrote last year which kaiser was kind enough to plug as his reading recommendation for the week you can also listen to and link to my own recommendations which focus on the impact the receding arctic ice cap and cheap u s natural gas could have on china and the world of course we recorded our conversation before the new york times published its taboo shattering expose on the hidden fortune controlled by premier wen jiabao s family members otherwise i suspect it would have ranked high among our discussion topics note however that i did mention the issue including mrs wen s connection to the diamond trade in my primer which is just one reason i suspect that article and now this entire blog is blocked in china 4 comments from china global economy politics boao review the realities of renminbi internationalization october 20 2012 tags capital account cny convertibility currency swap impossible trinity internationalization renminbi reserve currency rmb robert triffin trade settlement triffin dilemma trilemma usd yu yongding i have an article in the october 2012 issue of boao review the new journal published by the boao forum on what the future may hold for china s currency the renminbi i am told the article will be posted on the magazine s website this week and i will post a link when one is available the rise of the renminbi as an international currency challenges and solutions by patrick chovanec the rise of the renminbi as an international currency is looked up with an almost breathless anticipation from london to tokyo to sydney all this excitement has tended to eclipse a more sober assessment of the opportunities and obstacles the chinese yuan realistically faces as well as the benefits and burdens a larger international role for the renminbi would pose for china rarely are the questions asked does china really want or need to manage a global currency and if so what price is it willing to pay the growing role of the renminbi in china the renminbi has already come a long way not that long ago the renminbi wasn t a fully functional currency even within china s own borders all imported goods as well as services provided to foreign visitors had to be paid for with foreign exchange certificates fec in exchange for hard currencies while fec were ostensibly denominated in the same yuan as the renminbi used for domestic purposes their buying power was obviously quite different giving rise to a vibrant black market on the doorstep of every international hotel across the country gradually the yuan s exchange rate was allowed to depreciate nearly sixfold from 1 5 cny usd to 8 2 closing the trading gap and allowing china to phase out the fec in 1995 this opened the door for china to make the renminbi convertible for current account i e trade transactions the following year the flow of investment funds both into and out of china via the capital account however continued to be strictly regulated when china set up its two domestic stock exchanges in the early 1990s it went so far as to create an entirely separate market in so called b shares denominated in us dollars and hk dollars respectively in which foreigners and until 2001 only foreigners were allowed to invest in effect the inability to freely buy and sell renminbi was used as a firewall to insulate china s financial markets from the outside world in practice convertibility on the current account meant that chinese companies or foreign companies operating in china could exchange renminbi for foreign currencies to purchase imports as long as they presented a valid invoice trade itself both imports and exports was conducted almost entirely in foreign currencies mainly in us dollars the role of the us dollar in international settlement and its effect on international trade it s worth pausing for a moment and asking why us dollars after the us de linked the dollar from gold in 1971 demolishing the post war bretton woods system there has been no institutional framework enshrining the us dollar as the world s preeminent currency the dollar retains its role because market participants prefer to use it for three main reasons the dollar represents a claim on goods and services in the world s largest economy presuming it retains its value the dollar can be freely used or exchanged for any legal purpose without restriction the dollar can be held in a wide range of readily traded investment instruments and in large amounts the same is true of other international currencies such as the euro the british pound and the japanese yen but to a lesser degree in contrast someone who accepts a chinese yuan as payment or a nigerian naira a honduran lempira or a laotian kip may find it a lot harder to invest or find another trader who will accept it in turn many of these countries find it easier or even essential to conduct trade in a currency that is far more widely accepted using the dollar as an intermediary however does have costs take for instance an argentinian exporter selling soybeans to china since the seller can t use yuan and the buyer doesn t want pesos they both must pay a bank commission to change their money into dollars and then back again they may have no choice but to use a u s bank that has sufficient dollars available thus both sides run the risk that their currencies will fluctuate in value against the us dollar before the transaction is completed creating undesired gains and losses the drawbacks of relying on the us dollar were driven home by the immediate aftermath of the lehman brothers collapse in september 2008 for several terrifying days credit markets seized up exporters and importers all over the world who needed us dollars to conduct business couldn t secure financing and trade threatened to grind to a halt the federal reserve stepped in to provide dollars via swaps with other central banks but not every country found itself first in line to obtain relief it was this crisis that provided the impetus for china to negotiate bilateral currency swap agreements with several of its largest trading partners including indonesia argentina australia and brazil the rmb s increasing role in trade between china and other countries because few people understand what central bank currency swaps actually are or how they function the signing of these agreements has given rise to the misapprehension that the renminbi has already taken on a more prominent international role that includes being held as a reserve currency in fact no currency reserves have been exchanged the swaps are simply an emergency back up in the event of another crisis it is unclear how such swaps if implemented could be unwound except through careful stage management since there is no global market for banks to replenish their renminbi balances once deployed for now that is a bridge nobody is too worried about having to cross in any event the much touted currency swaps that china has entered into are a tailored response to a specific set of concerns and in no way herald the renminbi s arrival as a fully functional global currency of course china is not honduras laos or even argentina china now has the second largest economy in the world and is the world s largest exporter there are plenty of people around the world who want to buy chinese goods or make investments in china and would be willing to acquire renminbi to do so thus the renminbi fulfills at least the first criteria that made the us dollar a globally accepted currency it represents a claim that many people wish to possess in response china has begun to allow companies to invoice and pay for import and export transactions in renminbi rather than a foreign currency starting with a pilot program in 2009 settlement in renminbi grew four fold in 2011 to 2 trillion yuan 330 billion or 9 of china s foreign trade and in march 2012 was made available to all firms nationwide the growth in yuan denominated settlement and in offshore holdings of renminbi in hong kong have been hailed as a sign of the currency s inexorable rise to global dominance but critics including chinese economist yu yongding have pointed out that renminbi settlement has been heavily lopsided towards imports resulting in a net outflow of the yuan they argue that this currency outflow has been driven more by speculative anticipation of renminbi appreciation and by opportunities for exchange rate arbitrage than by any desire to hold renminbi as a genuinely useful currency beyond these immediate concerns however the imbalance in yuan settlement raises a more fundamental challenge to china s long term vision for the renminbi two undesirable scenarios in rmb s internationalization and the solutions in the 1960s the economist robert triffin observed an interesting dilemma involving the dollar s role as the dominant global currency in order for the dollar to be a desirable currency to possess it has to buy things that everyone all over the world wants but in order to meet that need the dollar has to be readily obtainable which means the u s must run a balance of payments deficit in other words it has to export currency either by running a trade deficit or by channeling a very large amount of investment abroad for the dollar to be a global currency there has to be some way for people around the world to get their hands on dollars up until very recently china has been running surpluses on both the current and capital accounts the result is that far from renminbi accumulating abroad china has accumulated a massive stockpile of 3 trillion in foreign currency reserves foreign buyers can t pay for chinese exports in renminbi because in net terms at least they ve had little chance to earn renminbi and unless china starts running a trade deficit or opens its capital account and allows a lot more investment to flow overseas any yuan the chinese use to pay for imports only adds to the sum of foreign currency left in china s official reserves heightening rather than reducing china s dependence on dollars for the renminbi to take on a more prominent international role much less emerge as the world s chief reserve currency would require a dramatic change in china s relationship to the global economy a change it is far from clear china either anticipates or desires opening china s capital account is the key to another obstacle facing the renminbi where if investors do hold yuan they are supposed to put them according to mckinsey 40 of global capital markets are denominated in us dollars giving investors including central banks deep and liquid markets in which to maintain large dollar balances china including hong kong accounts for just 4 mostly in equities and a large part of it barred to foreign investors china has tried to fill the void by issuing so called dim sum bonds yuan denominated securities sold in hong kong 35 7 billion yuan s worth in 2010 and 131 billion in 2011 but as long as the offshore market in dim sum bonds remains set apart in quarantined isolation from mainland capital markets it risks sharing the same fate as the stunted and illiquid b share market the only viable solution is for china to finish the process it began in the 1980s and make the renminbi fully convertible on the capital account allowing free flows of capital is really the only way china can in time develop into the kind of global financing hub that could support a truly international currency the problem for china s leaders is that achieving that goal requires giving up a substantial amount of control over the economy economists call it the trilemma or the impossible trinity no country can allow free flows of capital support a fixed exchange rate and manage an independent monetary policy at the same time one of them has to go and as the japanese discovered with their big bang in the mid 1990s opening china s financial system to outside market forces would make it a lot harder to hide and quietly manage any bad debt problems lurking in chinese banks so the question is not just whether the renminbi has the potential to become a truly international currency but whether china wants to go down the path that could make it one that path involves risks and rewards obstacles and opportunities but wherever it leads it will not leave the chinese economy unchanged 13 comments from china currency npr what s going wrong with china s solar industry october 10 2012 tags green tech ldk solar npr solar energy solyndra subsidies suntech wind energy yesterday i was on national public radio npr talking about the meltdown in china s heavily subsidized solar industry as a follow up to my wall street journal op ed on that topic last month you can read the transcript below or listen to the interview here steve inskeep talks to beijing based economist patrick chovanec about too many subsidies in china s solar energy industry it is resulting in...