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While market participants focus on the shorter-term projections, such as economic growth and reforms, there is no denying China has learnt from the best and taken a page from what the US do well: marketing.
The movement to push and market China to take over the US as the number one spot as the world’s economic leader has been gaining ground, using well-rehearsed scripts, clear communication and pure grit.
The first bold public declaration of this was from the Xinhua editorial calling for a “de-Americansed” world in October during the debt ceiling debate. However, the push for China’s RMB to be recognised as an international currency has been underway since the financial crisis in 2008 when the authorities first launched the pilot programme in 2009. This was known as the RMB cross-border trade settlement, where a number of companies can settle their trade in yuan. It was designed for importers and exporters, and selling this idea to international investors would have been met with scepticism. Their persistence paid off; today, institutional investors have changed their tone from “what?” to “how do we do this?” The acceptance of the yuan in international trade matches the rising status of China, making it the “ninth most-actively traded in the world, up from 17th in 2010”, according to Bank for International Settlements.
When Chinese Deputy Finance Minister Zhu Guangyao urged American politicians to avoid a default, the Tea Party Republicans told them to mind their own business. It is exactly this attitude that makes it easy to overtake America. It was also the catalyst that united the patriotism of mainland Chinese abroad working in foreign banks to ramp up efforts through road shows and conferences pitching institutional to clients that RMB is the new reserve currency and Chinese bonds are a secure investment vehicle with zero default risk.
The question of how RMB can become an international reserve currency when it lacks liquidity and convertibility in global trade is answered by the PBOC’s solution of bilateral currency swap agreements (BSA) with specific countries. So far, it has actively engaged with “22 foreign central banks” since 2008, according to Xinhua. The latest to ink this deal is the ECB agreeing to the size of $57 billion, making it the third largest agreement after Hong Kong and South Korea.
However, “de-Americanisation” is easier said than done and has many challenges. In the quest for yield, US Treasuries remain the investment of choice and China is still the biggest holder despite selling off its holdings in October bringing their total to $11.2 billion according to Bloomberg. Its mammoth foreign exchange reserve has grown to a reported $3.66 trillion in 3Q; to put things into perspective, Japan ranks second with less than half of China’s reserves at $1.27 trillion. This makes it difficult for China to diversify from US Treasury bonds, which means the Sino-American relations will be convoluted, where views between an adversary and a partner interchanges.
The Chinese government understands that a lot needs to be done before it gets to those goals. The third plenary session might not address these issues head-on, though it is becoming more widely accepted that China will dominate the world by 2020. Former Chinese President Deng Xiaoping is well known for using the proverb “two tigers cannot live on one mountain.”