Should Jamaica be making more use of the Chinese currency?
JAMAICA'S growing economic relations with China makes it important for us to understand the issues relating to the Chinese currency, the Renminbi, also known as the Yuan.
The Renminbi is issued by the People's Bank of China and is legal tender in China but not Hong Kong. Until 2005, the value of the Renminbi was pegged to the US Dollar, but since then its exchange rate has been allowed to float.
The Renminbi is now the eighth most traded currency for payments in the world, having climbed from 30th three years ago. The rapid increase in its use as a globally accepted means of payment is an indication of China's expanded share of world trade and changes in China's policy regarding its growing integration into the global economy.
However, at present, the Renminbi accounts for only 1.1 per cent of international payments. This is minute compared to the US Dollar, which accounts for 40 per cent, and the Euro, which accounts for 33 per cent. But the use of the Chinese currency for international payments is certain to increase, especially as China's share of global trade and investment continues to grow.
Until recently, many governments were unwilling to hold the Renminbi as a store of value because of fears that the exchange rate was deliberately undervalued by China to gain a competitive edge in international trade. The United States has repeatedly made the accusation that China has manipulated its exchange rate to gain an unfair advantage in the promotion of its exports.
However, confidence is being steadily gained, aided by the currency's two per cent appreciation against the US Dollar. Yet, confidence aside, for a currency to be an international reserve note there has to be a sufficiently large supply of it. The US Dollar has been in this role because the enormous US trade deficit creates an outflow of payments and much of it returns to buy US goods, services, Treasury bills and US government securities.
China has a trade surplus and the world has not yet developed an appetite for Chinese government paper.
Jamaica has clearly been taking notice, based on Finance Minister Peter Phillips' recent revelation that he raised the prospect of engaging Asian markets in becoming interested in Jamaican paper whenever we return to the market, during his recent trip
China has recently introduced a number of measures to enhance the prospects for the increased international use of the Renminbi. These together with the country's growing share of Global GDP, trade and investment, foretell
the expanded role of the Renminbi in international payments.
As trade with China grows, it will be advantageous to settle directly by using their currency, instead of through a settlement currency such as the US Dollar or the Euro.
Countries, like Jamaica, whose imports from China have risen sharply in recent years and are likely to import even more from China and/or receive Chinese loans, would do well to explore the use of the Renminbi.