Tag: currencies

British banks most exposed to Chinese market instability

Disclosures from two of Asia’s largest lenders showed that British banks are among of the most vulnerable to the current market troubles in China.

In its latest report, HSBC said outstanding loans to China grew 12 percent in the past year to $36.2 billion. Standard Chartered also revealed its overall exposure to Chinese customers rose by 30 percent during the same period.

The rapid growth of the Chinese economy has seen a rise in the numbers of British banks acting as foreign lenders, resulting in a record total of $221.2 billion outstanding loans to China, more than twice the total of US banks, with $86.5 billion outstanding loans.

UK banks were also the largest source of new loans to China during the year ending March 31, topping the list of 25 countries whose banks report their lending data.

The revelations come as the pound suffered its worst day of trading against the Euro in six years.

After months of strong trading against the Euro due to the Greek financial crisis, the pound fell by 2 percent, before regaining half a percent and finishing the day in a 1.5 percent drop.

Speaking during a visit to Finland on Tuesday, Chancellor George Osborne said Britain’s open economy made it vulnerable to economic tremors across the globe.

Source: RT

Yuan inclusion in SDR basket inevitable

An integrated Eurasian block will dominate the world. The Chinese are acting upon that insight.

The IMF is due to re-examine the composition of its currency basket for Special Drawing Rights, a foreign-exchange reserve asset for fund members, later this year says Zhao Yongsheng.

“Our assessment now is that the substantial real effective appreciation [of the yuan] over the past year has brought the exchange rate to a level that is no longer undervalued,” the IMF said last week after it concluded its 2015 Article IV Consultation Mission to China.

Does this mean that the yuan is about to be included in the SDR currency basket? We can consider a “signal” sent by IMF Managing Director Christine Lagarde during a speech at Fudan University in Shanghai in March: “It’s not a question of if, it’s a question of when.”

Her speech, and the IMF’s announcement, indicate that the yuan is quite likely to be included in the SDR basket when it is reviewed this year.

But merely joining the SDR basket is not the only important step for the yuan, even if it is already a significant development in the currency’s internationalization.

Actually, the inclusion of the yuan in the SDR basket is not just a question of “if” or “when,” but a question of “how much.”

Let’s look first at the composition of the SDR basket, which now includes the four strongest currencies in the world: the dollar, euro, yen and British pound.

When the SDR was launched in 1981, the shares for the five currencies in the basket were 42 percent, 19 percent, 13 percent, 13 percent and 13 percent for the dollar, Deutsche mark, French franc, yen and pound, respectively. The basket is adjusted every five years.

Looking at this original composition, we can divide the basket’s basic structure into two blocks: the “Deutsche mark-French franc block” (or the “euro block” after the adoption of the European single currency in 2001) and the “dollar-pound-yen block.”

This division is based on differences in culture, historical links and even military relationships.

It is true that Germany and France are not the same, as one is a Germanic culture and the other is a French or half-Latin culture.

Nevertheless, these countries had no choice but to work together to establish and expand the European Union. Especially since the birth of the euro, monetary and financial relations between Germany and France have become closer. They are both countries of Europe’s continental culture.

For their part, the UK and US share an “Anglo-Saxon” culture, and their relationship is that of siblings. With regard to Japan, it has close links to the US due to its post-WWII occupation and rebuilding by the US. That’s why we put these three countries and their currencies together.

Originally, the combined share of the mark and franc was 32 percent.

Even if we assume this European continental culture block increased to 37.4 percent for 2011-15, it would still lag far behind the dollar-pound-yen block, which stands at 62.6 percent for the same period.

How can we maintain balance in the SDR basket?

Balance is essential for any game with multiple players, and that is also true of currency baskets.

In the case of the above division, obviously the gap of 25.2 percentage points between two blocks is too huge to be good for stability.

If we assume a share of 10 percent for the yuan in the SDR basket, the euro plus the yuan will make up 47.4 percent of the basket, against a new share for the dollar-pound-yen block of 52.6 percent. Now, the gap is not so large.

Why do we put the euro and yuan together? This implies the necessity for Europe to find another force to implicitly provide balance against the “American hegemony.”

The increasing closeness of Europe and China will be gradually reinforced with the adoption of China’s “One Belt, One Road” initiative and the operation of the China-initiated Asian Infrastructure Investment Bank.

This solution can also be a moderate and acceptable reform for the current players in the SDR basket, whatever their position, because even with the new composition, the dollar-pound-yen block will retain a dominant position with 5.2 percentage points more than the euro-yuan block.

Finally, in China’s pursuit of inclusion, France will play a major role – and not only because the IMF’s president is usually a French national.

It is also because France needs China, probably much more than do other countries, to recover from the lingering effects of the financial crisis and keep its economy growing.

Source:Global Times

The author is a Paris-based economist and vice-president of the Paris-based China-France Association of Lawyers and Economists. bizopinion@globaltimes.com.cn

China, Argentina agree on currency swap

Argentina, which defaulted on its debt in July, will receive the first tranche of a multi-billion dollar currency swap operation with China’s central bank before the end of this year, the South American country’s La Nacion newspaper reported on Sunday.

The swap will allow Argentina to bolster its foreign reserves or pay for Chinese imports with the yuan currency at a time weak export revenues and an ailing currency have put the Latin American nation’s foreign reserves under intense pressure.

La Nacion said Argentina would receive yuan worth $1 billion by the end of 2014, the first payment of a loan worth a total $11 billion signed by Argentina’s President Cristina Fernandez and her Chinese counterpart in July.

The daily newspaper said the presidents of the countries’ two central banks had met on the sidelines of a meeting in Switzerland, but did not say how it had obtained the information.

Fernandez’s government has imposed stringent import and capital controls to safeguard the dwindling reserves, now at around eight-year lows, which it needs to pay its debts.

Source: Reuters

Greenpeace employee loses millions in failed currency gamble

The know-it-alls, don’t know much about handling their own money.

Greenpeace has fired an employee who lost the environmental charity $5.47 million in a failed gamble on international currency markets, reports ABC Australia.

Greenpeace communications director Mike Townsley said the unnamed employee “went above his authority” in agreeing the deal with a broker who was meant to mitigate currency losses for the charity.

The euro will remain the world’s favourite tradeable currency

With the rise of Bitcoin and general hostility towards so-called fiat currencies, notwithstanding the euroskeptic animosity towards the euro, many people are speculating about the ultimate demise of the euro. However, as French politician Marine Le Pen recently intimated to Der Spiegel, the euro is something of a German creation.

In essence, the euro represents a reincarnated Deutschemark, with bits of Dutch guilders and Belgian francs thrown in. Ever since French Finance Minister Pierre Bérégovoy decided to start fighting inflation in the German style during the 1980s, France also acquired a hard currency hitched to the Deutschemark, leading to the equation Germany + Benelux + France = one European currency. The French almost succeeded in smuggling a very old Gallic monetary unit, the écu, in as the ECU (European Currency Unit) but somehow the ploy did not succeed and today we know it as the euro, officially known to fx traders as the EUR. The public at large have got used to the symbol €.

And let’s not forget about Austria which also joined the monetary Anschluss with aplomb, ditching the Austrian schilling on 1 January 2002 when the euro started to circulate officially in the so-called eurozone.

Even if all the countries in Southern Europe had to go back to trading in their national currencies, the biggest part of the European Union, economically speaking, would still be using a unitary currency. The combined GDP of Germany, Austria, France and the Benelux countries is $7,75 trillion, whereas the total eurozone GDP equals $12,7 trillion. So we see that the original European currency club whose currencies first started to converge in the 1980s constitutes 61 percent of the eurozone’s GDP. If Italy is thrown in, it goes up to almost 77%. Italy has a large economy worth just over $2 trillion of annual GDP. During the dying days of the lira, Italy too started to seriously converge toward hard-currency status, similar to its transalpine neighbours. Parts of Northern Italy are really no different to Germany, with medium-sized businesses being heavily oriented towards exports of specialised machinery and consumer goods, including gold jewellery.

Talk in the British financial press of the “Club Med” countries who are out of sync with Germany and neighbours to the north-west is therefore of no real consequence, as any currency trader knows. Betting against the euro has been, for the most part, like going short the old Deutschemark or Swissie against the dollar, a long-term losing trade if ever there was one.

There are only two really liquid currencies in the world today: the dollar (USD) and the euro (EUR). Traders at the major currency banks like Citi, Deutsche, HSBC, JP MorganChase, UBS and others usually make a market in the EUR-USD pair in “half a yard”, i.e. half a billion euros that may be traded in a split second.

The recent hostility of the USA towards French and Swiss banks like BNP Paribas or Crédit Suisse has probably not been lost on Europeans in general. If ever the world had to go back to a dollar-only system, America could dictate terms (and gargantuan fines!) to everyone else.

So, love it or hate it, the euro is here to stay. If there had been another strong currency in the world, perhaps its future would have been less certain, but given long-term dollar weakness, it is the US currency that may unravel some day in the not too distant future. America has simply accumulated too many huge deficits, including budget and trade deficits, for the dollar not to depreciate over the long haul.

Probably the most stable currency in the world is the Swiss franc (CHF). However, despite Switzerland’s economic prowess and major role in banking, a country of 7 million people will never provide us with a global, tradeable currency.

The size of the global foreign exchange or FX market is $5,3 trillion per day. That is according to the Bank for International Settlements and the global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity.

The EUR/USD (about 33% of all trade by volume) is the most actively traded currency pair by far, followed by the GBP/USD (13%) and USD/JPY (12%). Together these pairs alone account for 58% of all forex trade by volume. In their other possible combinations, EUR/GBP (4%), EUR/JPY 2%, GBP/JPY (1%), they account for about 65% of all forex trade.

Taken individually and looking at all the estimated trading volume of all the pairs these typically trade in, the USD is involved in over 71% of all forex trade, the EUR in about 41%, the GBP in about 18%, and the JPY about 16%.

We see then that the euro, while not having the privileged position of the dollar as a reserve currency, is nonetheless the only currency that may rival the dollar in the global currency market. If ever US military adventures in the world could turn a sizeable number of nations against it, the dollar could start to suffer as the preferred medium for oil and other commodity transactions. The only other currency that could remotely replace it as the world’s leading currency would be the euro.

Long-term dollar weakness driven US deficits represent the prime reasons why investors and foreign central banks may eventually lose their appetite for the greenback.