Talking about "failing economy" eh. The First step towards improving the value of its currency.
Now china is buying bonds in yuans.
China’s $50bn IMF deal puts 'redback' on the world stage
Leo Lewis, Asia Business Correspondent
September 5, 2009
China is using a $50 billion (£31 billion) bond deal with the International Monetary Fund (IMF) to expand the global reach and influence of its currency in what analysts say could be a potentially huge development in Beijing’s campaign to internationalise the “redback”.
For the first time, China will be using its own currency, the yuan, to buy IMF bonds — a move that senior economists confirmed as part of an accelerated programme by Beijing to “project the yuan around the world”.
That campaign, which has until now been waged only tacitly, has already seen China signing currency swap deals in South America and agreeing to lend yuan to South Korea, Malaysia and Indonesia. Recent comments from the Chinese Government suggest it is planning to rebrand Hong Kong as the future hub for offshore yuan financing. Some commodity traders believe it is only a matter of time before oil deals between the Middle East and China are transacted in yuan rather than dollars.
The IMF bond gambit could see the Chinese currency temporarily jostling its way into the foreign exchange reserves of central banks in Asia, Africa and Latin America — an intrusion that would challenge the dollar as the world’s default reserve currency.
Beijing is buying the IMF bonds as part of international support for a $500 billion emergency pool being established by the fund — money that can be drawn on to provide loans for economies still shattered by the financial crisis. On Thursday, the People’s Bank of China became the first central bank to purchase the five-year bonds, though Russia and Brazil are expected to follow suit. But, in a move that has raised eyebrows among currency-watchers, China revealed yesterday that it would pay for the bonds in its normally tightly controlled currency.
Beijing’s decision to pay such a hefty sum into the IMF fund is seen as a piece of twin geopolitical strategy.
First, it significantly enhances China’s status within the IMF, and provides Beijing with yet another avenue for assisting emerging economies around the world. The move may even serve to “acclimatise” the central banks of emerging economies to the idea of holding yuan in their reserves.
But, second, the move could also play as a public snub for the dollar. China already holds the world’s largest dollar reserves — about 60 per cent of its total foreign reserves of $2,130 billion. The purchase represents a high-profile move away from the old dollar-dominated buying strategy.
In common with the usual process of payments into the IMF, China’s new bonds will be denominated in so-called Special Drawing Rights (SDRs). What happens next to the yuan now held by the IMF, say analysts, is the crucial question.
In one scenario, it could use yuan to lend to some member countries, which might take their yuan back to China where they could be exchanged for a freely convertible currency such as the US dollar. But in another, said Wengsheng Peng, a Barclays Capital economist, the borrowing country might keep the Chinese currency and use it to buy goods from China.
“It potentially helps to promote the use of yuan as an international or even reserve currency,” he said, “although the involved amount is not large, it could send a significant signal. Some central banks who borrow from the IMF will end up holding yuan for albeit a brief period. Also, China may reach an agreement with the borrowing country on using yuan to pay for imports from China. This would help to promote the use of the yuan for trade invoicing and settlement.”
Zhang Bin, an analyst at the Chinese Academy of Social Sciences, said in a research note that there were several ways that the bond purchase in yuan marked a step on the road to internationalisation for the currency. The IMF could use yuan to buy assets from other financial institutions or to issue loans. “This would signify that the yuan, to a certain degree, would replace the dollar as a global reserve currency. It would be an impetus for yuan internationalisation and it would have a negative influence on international demand for the dollar.”
http://business.timesonline.co.uk/tol/business/economics/article6822804.ece
