China Yuan gets help from other
Former NYC Mayor Michael Bloomberg will act as the chair of a new working group tasked with building framework for the direct trading of China’s yuan in the U.S. Of note, the new group will reunite ex-Treasury secretaries Henry Paulson and Timothy Geithner, who will serve as co-chairmen. Ex-SEC chief Mary Schapiro will be vice chair of the group.
The impetus behind the group is that new trading and clearing services for the Chinese yuan to the U.S. would reduce costs buying goods and services from China. It will also permit U.S. financial firms eager to offer various types of financial products such as hedges and other yuan-based trades.
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Point72 Asset Management losing about 10% in January, Millennium Management on a hiring spree, and hedge fund industry's assets under management swell to nearly Read More
Several U.S. and Chinese mega-banks, including Citigroup, JPMorgan Chase, Goldman Sachs (where Hank Paulson was former CEO) and the Industrial & Commercial Bank of China, also have signed on to assist the group.
High-powered new working group advocating direct yuan – US dollar trading
Setting up foreign-exchange hubs in global financial capitals such as New York is the next step in China’s to establish the yuan as a global currency. The IMF approval of the yuan for the inclusion in its reserve currency basket today has been widely anticipated, but the U.S. only endorsed the move after China loosened currency controls earlier this year.
Of interest, Canada and the UK established yuan-clearing hubs earlier this year in Toronto and London.
The working group is developing a plan for local U.S. yuan trading and clearing, and will provide recommendations to government officials in both countries.
Financial industry analysts point out that U.S. officials focused on other economic issues in the past, including transparency and cyber-security, in their negotiations with China. Given that it is already possible for large American companies to use U.S. dollars to pay for goods from firms in China, direct yuan trading has not been an urgent topic until recently.
“Advancing a mechanism to trade the Chinese currency in the United States will improve the competitiveness of U.S. companies, while furthering America’s financial sector and economy,” Bloomberg commented in a statement Monday.
According to knowledgeable sources that spoke to the Wall Street Journal, Bloomberg has been lobbying U.S. and Chinese officials to set up a yuan-clearing hub in the Big Apple.
China joins IMF reserve currency basket
After trying for several years, the Chinese yuan was finally accepted by the IMF for entry into its reserve currency basket on Monday. The decision by the IMF to include the yuan with other major global currencies is certainly a “big deal” from the perspective of prestige for China and the leadership of the country, but it really doesn’t mean that much in a practical sense.
As pointed out by a recent article on ValueWalk, just joining the IMF’s reserve currency basket does not automatically make the yuan a “reserve currency”. A reserve currency must be freely convertible across the globe, and the country of issuance must allow foreigners who have acquired currency to spend it on domestic Chinese assets. The Chinese yuan does not meet either one of these conditions today, but steps like the new working group discussed above are moving the yuan in the right direction.