After the official unpegging of the Renminbi (Also referred to as the yuan) to the dollar mid-way through last year, China has surprisingly started to increase the flexibility of the Renminbi and is actively encouraging the globalization of the currency. Much of this change has come for two reasons. The first is as China has become the world’s second largest domestic economy, the need for a globalized currency becomes exponentially more important. Also, international pressures on the Renminbi and China, especially from the U.S., have started to force change.
The first change, which is much more noticeable to most investors, is the establishment of international branches of the Bank of China. According to an article in the Wall Street Journal, the Bank of China has set up major branches in New York and Los Angeles. The goal for both of these branches, more importantly the New York branch, is for them to become the American clearing houses for the yuan. It has been possible previously to get ahold of the yuan but this newest move, although only $4000 dollars are allowed to be converted per day per person, is showing the Chinese government’s approval and desire to finally expand the use of the Renminbi. Currently, the use of the Renminbi is negligible with less than 1% of all Chinese international transactions taking place in the currency. Analysts’ expectations are that in a few years the currency could be used for as much as 20%-30% of all international transactions with China.
Another major change is a new trial program for foreign investment into China. While many of the rules and regulations are unclear, the program will allow foreign investors to invest in Shanghai based private equity companies (P.E. firms raise large pools of money to invest in and buy private and public companies) and bypass all the stringent regulations and restrictions on currency conversion and investment. The decision has come for several reasons. First, with China’s rampant growth, the government wants businesses to have to rely less on bank loans and have other methods of financing their operations. A second reason is the experience that will be brought to the table with foreign investors. Private equity is a large business around the world with the resources and necessary experience to streamline and grow China’s fledgling private equity industry.
I think China is really making a move in the right direction. With its explosive growth and natural size it has easily become one of the biggest economies in the world and now realizes that in order to maintain the position, it must become a more globalized country. The freeing of restrictions on the currency will ease many tensions with foreign governments and allowing the foreign investment in private equity will allow for a more competitive Chinese economy as well as investing benefits for the rest of the world.