Campaign for yuan’s recognition

The recent signing of the memorandum of understanding between the Bangko Sentral ng Pilipinas and some of the country’s biggest banks for the establishment of a Philippine peso-Chinese yuan (or renminbi) spot trading market is proof of China’s financial clout in the Asian region.

Through that facility, the conversion of the peso and yuan to each other’s currency can be done without first being converted to their equivalent in US dollars.

The spot market will make transactions between the two countries faster, cheaper and more efficient because the friction costs arising when foreign currencies are valued against each other are eliminated.

This arrangement will be a boon to local banks that handle financial transactions between Philippine companies engaged in export-import and other businesses with Chinese companies.

With the initiation of the peso-yuan spot market, the Philippines joins a list of countries that have entered into similar arrangements with China.

These countries are either recipients of huge financial grants from China, or are heavy borrowers of Chinese financial institutions, or are major trading partners of Chinese companies.

Under these circumstances, it makes good business sense for the concerned countries to eliminate the intermediary step of US dollar conversion in determining the value of their respective currencies.

For China, however, the business efficiency factor in these arrangements does not appear to be the end-all; it’s merely secondary to its unabashed ambition to make the yuan a major currency for world trade.

Despite China being the second largest economy in the world, the yuan does not enjoy the status of a global or reserve currency—the money countries or people would like to have in their coffers for international transaction or foreign exchange reserve purposes.

In the foreign exchange market, that standing is enjoyed, in the order of their tradability and acceptance, by the US dollar, euro, Japanese yen, British pound, Canadian dollar and Swiss franc.

Although in 2016 the International Monetary Fund included the yuan in its basket of currencies for determining special drawing rights (or currencies recognized as part of member countries’ official foreign exchange reserves), China’s currency has a long way to go before it gains acceptance as an international reserve currency.

In the Philippines, if given a choice, the ordinary overseas Filipino worker would, after the currency of the country where he or she is working, probably prefer to keep his or her earnings in US dollars, euro or Japanese yen rather than the unknown yuan.

The slow (if not difficult) recognition of the yuan as a reserve currency has been attributed by some international financial analysts to the lack of transparency in China.

For international investors, transparency in key financial data and its sources, including government economic policies, is essential in determining if the declared worth of a country’s currency can be trusted or the statistics on which that value rests are genuine and not falsified.

Note that the countries whose currencies are actively traded in foreign exchange markets are democratic and promote, among others, the free exchange of information among their citizens.

That’s not the case with China. Its Communist Party governs with an iron hand and controls the kind of information that can be shared with its citizens or the international community.

Without any means of independently verifying the veracity of China’s financial reports, the international financial community has no choice but take them at their face value and make investment decisions on that basis. And that is not exactly comforting.

By agreeing to the direct conversion of the peso to the yuan, and vice versa, the Philippines is, in effect, sending the message to the international financial community that the yuan is trustworthy and worth its declared value vis-à-vis the peso.

Only time and China’s future actions will tell if the yuan will accomplish its objective to be recognized as a global or reserve currency.