China Nowhere Close to Becoming a Global Financial Center for Many Reasons

-edited

China lowered the official limit on US dollar withdrawals from $5,000 to $3,000. One woman could not get a mere $200.

Crackdown on Withdrawals

The South China Morning Post reports Chinese Banks Quietly Lower Daily Limit on Foreign-Currency Cash Withdrawals.

The issue was thrust into the spotlight on Friday when a viral video clip showed a bank cashier unable to answer a furious customer demanding to know why she was not allowed to withdraw US$200 from her dollar-denominated account, even though she was within her quota.

The client was so incensed by the refusal that she filmed the incident on her phone at the unidentified branch of China Merchants Bank (CMB).

She also asked why the bank insisted she could only withdraw her US dollar savings by converting into yuan, the Chinese currency. The cashier seemed caught off guard, unable to address the woman’s questions.

It later emerged the woman had been placed on a “watch list” of customers making frequent withdrawals.

Shanghai Not a Global Capital Market

In 2009, Shanghai officials pledged it would be on an equal footing to New York, London and Hong Kong by 2020.

It's 2019 and China isn't close.

US bankers say, Chinese capital controls mean Shanghai is not a global financial hub.

Restrictions on the movement of capital in and out of China have scuppered ambitions to become an international money market, with US bankers saying that it is still another five to 10 years from regaining its pre-Communist era status as the financial capital of the East.

China’s strict control of capital flows, heavy government intervention in financial markets, and the limited use of the yuan in international markets have restricted Shanghai’s role as a financial hub.

The presence of foreign money in China's stock market in Shanghai is also tiny – less than 0.5 per cent of publicly traded stocks in Shanghai were owned by foreign investors as of the end of March, according to data from the Shanghai Stock Exchange.

The government’s intervention in the stock market is seen as a key barrier to reaching the 2020 goal.

Not Ready for Prime Time

“Shanghai would immediately become a top-tier global financial centre were it to end capital controls and freely float the yuan, but Beijing has given no indication that such measures are even being contemplated,” said Brock Silvers, managing director at Kaiyuan Capital, a Shanghai-based private equity firm.

Gold-Backed Petro-Yuan Silliness

Every month or so, for years on end, I saw articles on how the yuan would displace the US dollar as the world's reserve currency.

I mocked every one of those articles and continue to do so.

For example, please consider my October 2017 article Gold-Backed Petro-Yuan Silliness: Reserve Currency Curse?

A massive amount of hype is spreading regarding China's alleged ambitions to dethrone the dollar. The story this time involves China's plan is to price oil in yuan using a gold-backed futures contract. Even if that were true, the impact would be zero. Nonetheless, CNBC is now in on the hype.

CNBC reports China has grand ambitions to dethrone the dollar. It may make a powerful move this year.

The powerful move was nowhere to be found then or now. Here are the reasons I posted in 2017.

Currency Requirements

If China wants to assume the role of having the world's reserve currency, something I highly doubt actually, it will need to have a free-floating currency and the world's largest bond market .

Political Requirements

China will need property rights protection and a global willingness of countries to hold the yuan in order for the yuan to be the world's reserve currency.

Balance of Trade Requirement

Finally, China would have to be willing to run trade deficits instead of seeking trade surpluses via subsidized exports.

Please read that last sentence over and over again until it sinks in.

Mathematically, whether they like it or not, China and Japan have massive US dollar reserves as a result of cumulated trade surpluses.

Reserve Currency Curse

Having the world's reserve currency is a curse because it necessitates a willingness to have endless trade deficits .

Mathematically, as long as China runs surpluses, foreign holding of yuan will not match foreign holding of dollars.

A mathematical corollary to having massive trade deficits year in and year is the need to have the world's largest bond market.

Adding gold into the yuan-futures mix does not alter the picture other than to add costs.

Case Closed

The idea that the yuan will soon replace the dollar as the world's reserve currency is absurd for currency reasons, political reasons, and economic reasons.

Anyone who suggests otherwise understands neither currencies nor global trade.

Finally, given the implications of the reserve currency curse, I highly doubt China even seeks what these petro-yuan analysts claim.

What's Changed?

Everything from "Currency Requirements" through "Case Closed" I wrote in 2017.

I commented on most of those aspects long before that.

The gold and petro-yuan ideas were new, so I immediately debunked them.

Nothing Has Changed

  1. China still does not float the yuan.
  2. China still does not have any global bond market to speak of, let alone the world's largest.
  3. China still does not respect property rights.
  4. China still has capital controls, an absolute no-no.
  5. China is still not willing to run trade deficits.

Wake me up when those five things are fixed.

Meanwhile, if anyone tells you the yuan is about ready to replace the dollar as the world's reserve currency, write them off as clueless.

We have been seeing such stories for a decade or longer, but China isn't remotely close in at least five areas, and perhaps never will be.

Mike "Mish" Shedlock

Comments (19)
No. 1-12
Quatloo
Quatloo

Great article, appreciate your insight!

gdpetti
gdpetti

Everything I've heard says China doesn't want to replace the US dollar with the yuan as the world's reserve currency.... they want a basket with the Yuan's 'approapriate' share represented in it.... they simply aren't interested in the Western style of empire, which has always been their historical example...They know the trap it brings especially until they get the rest of the interior up to speed economically. Most of their development has been the coastline, same in most countries actually, which becomes a problem later... and given the Party's concern about dissent, maintaining control at home takes priority... and not fighting until necessary is classic Art of War.. drain your enemy first of all their strength... and that's what's happening...

Meantime, the real PTB/SG is outing their OWO and prepping us for their NWO... global police state... isn't that obvious? The clown show in DC or London are prime examples of this meme to out their own puppets, and thereby their OWO they front.... typical puppet show theatrics most of the time... before they pull the rug out on it.... seems prime for that to occur soon. CHina doesn't want to get in the way of us hanging ourselves first... again, classic Art of War.

Menaquinone
Menaquinone

Asian revolutions can be messier than the French Revolution or the US Civil War. Chinese robber baron bureaucrats want to save their necks and get their money out of China before the hungry peasant hordes arrive.

DFWRealEstate
DFWRealEstate

All excellent points. Chinese nationals continue to purchase U.S. residential real estate, $billions of investment every year. You don't see the same numbers of Americans buying Chinese residential property, for many of the same reasons Mish just mentioned. "For the sixth consecutive year, China exceeded all other countries in dollar volume of purchases, buying an estimated $30.4 billion worth of residential property" - NAR 2018 Profile of International Transactions in U.S. Residential Real Estate The Chinese know their economy is a centrally-planned Ponzi scheme centered on real estate development, so they are eager to get whatever cash they can out of the country and into alternative investments.

Aaaal
Aaaal

China must strive to have a truly free market like the USA. And more importantly have an orange haired buffoon piloting the ship. Starboard, port, starboard, no port, no starboard.

thimk
thimk

excellent bit of financial knowledge . but can you elaborate on china's dual currency system (i.e. off shore and onshore) and how it effects markets ? What purpose it serves ? thanks

Sechel
Sechel

can't be a global financial center without a freely convertible currency. China may get there someday but they ain't there now

Advancingtime
Advancingtime

There is a solid reason why so little is being said about Japan and Korea when it comes to the talk of "Trade Wars." The article below delves into how Japan has exploited its close proximity to China over the years in an effort to remain relevant as a power. This also feeds into the value of the yen as a "proxy" currency.

everything
everything

I tend to think many would just as rather convert yuan by buying up pieces of the world. We have that same problem over here, where the rich own or control most of the money.

RonJ
RonJ

Martin Armstrong notes that the financial center won't be moving from west to east until 2032. That is still a lucky 13 years away. Considering how fast time flies, it is already 10 years since the end of the Great Recession.

China has obstacles to overcome, but the Berlin Wall seemingly fell all of a sudden and eastern Europe changed dramatically in a short time.

10 years ago there was no such thing as QE, then suddenly there was. There was no such thing as negative rates, then suddenly there was. Now, suddenly, Magic Money Tree is all the rage. Things turn on a dime.

Casual_Observer
Casual_Observer

It will never happen for one big reason. A centrally controlled communist country with no transparent economy and an export driven economy is nothing but a colony to those in the first world. Despite all the books and articles about China and India becoming first world global economic powerhouses they are nothing more than economic colonies of the US and EU for products and labor.

ELGRECO
ELGRECO

As always a thought provoking article.The dollar shortage is real but it's not unique to China. It is probably a factor of interest to every participant of the eurodollar market; and that includes the US and its banks. Sure, the Fed holds the key, and it will have to address this shortage soon if not for its own banks, then for the financial system as a whole. I'm not sure which sources are pretending that China aspires to being the reserve currency tomorrow or the day after, but if you tell me me you read it on some PBOC article or paper, then perhaps they wish for readers to think they aspire to being the reserve currency?

One day of course, if the western system continues along the present path, the effect of any policy action undertaken by the Fed the ECB and the BOJ combined will diminish to zero and a gap will open up for an alternative system of reserve and collateral requirement; that doesn't necessarily mean it will be the Yuan that fills that void, but something else will. Who designs that new system is another discussion altogether, and one that I would love to read you speculate about someday on your website. You might have to widen your view beyond the G7 for that.