Friday, December 6, 2013


There's one thing My Really Smart Friend Larry and a Really, REALLY Smart cousin of mine must have in common:  as the latter's grandmother once remarked, "He was a pain in the ass from the day he was born."  Bet Larry was too.

Anyway, the following arrived this morning with the admonition that I had gotten it a bit wrong and attached was this commentary from the South China Morning Post.

The yuan has surpassed the euro to become the second most commonly used currency in global trade finance, after the US dollar. Yuan usage in trade finance grew to 8.66 per cent in October from 1.89 per cent in January last year, according to the Society for Worldwide Interbank Financial Telecommunication (Swift). 
SCMP, December 4
Hip, hip, hurrah! And now, if we have done cheering, let's look a little more closely at this remarkable statistic.
Swift has used a narrow definition. It has measured only the portion of global trade financed by the traditional means of letter of credit, which interposes a bank between buyer and seller to help guarantee payment and delivery. It is not surprising that Swift should use the narrow definition. Swift is a bank international payment service. It is therefore primarily interested in how banks profit from trade finance, which happens to be when trade is conducted through letter of credit.
But an estimated 80 per cent of international trade is now conducted on open terms. Trade partners who have long done business with each other increasingly don't see the need for a bank intermediary. They decide to trust each other and not pay for this costly extra level of security.
China's foreign trade in yuan, however, is still dominated by letter of credit. Thus the only thing that the Swift ranking of global trade indicates is that exporters and importers who settle their accounts in yuan do not have that same high level of trust in each other that is enjoyed by most other traders. I can't see that yuan boosters have anything to crow about.
There is more. Along with the bar chart showing China's No2 position in letter of credit trade, Swift published another bar chart showing a ranking of currencies by value of worldwide payments.
In this one, the yuan was No 12 with only a 0.84 per cent worldwide share, slightly behind the Thai baht and a smidgen head ahead of the Norwegian krone. Norway has a population of five million, China of 1,360 million at latest count.
And China actually slipped a little in October with growth for all payments of 1.5 per cent against a worldwide growth of 4.6 per cent.
All of which is just another roundabout way of saying that the cheerleader squad for worldwide use of the yuan is starting to go a little over the top these days with its unending chorus of "Rah, Rah, Renminbi".
Take chief cheerleader Anita Fung Yuen-mei, of HSBC, for instance. We had her in this newspaper again the other day saying that yuan deposit growth in Hong Kong is so big, so huge, that it might put the squeeze on Hong Kong dollar liquidity. I haven't the space here to tell you why this is a theory from Never Never Land but will someone from the Hong Kong Monetary Authority please pull her in to tell her how the peg works. It seems she played truant from HSBC training school the day that the lesson on origins of money was taught.
Here is a little factoid on why we have seen more settlement of trade accounts in yuan over the past few years. The chart tells the story. The yuan has been pushed steadily stronger against the US dollar by the People's Bank of China.
This means that merchants in Hong Kong are quite happy to accept yuan for payment of goods shipped to the mainland. They then have the means of speculating on further yuan strength. It's a gift given them by PBOC policy.
Don't ask what might happen should the PBOC finally decide to call a halt to this policy. That's grim. Let's not go there. 
This article appeared in the South China Morning Post print edition as Too Swift to jump to conclusion on yuan's usage

Now all that is right and good but it doesn't disprove anything about which I speculated.  For example, the manner in which one builds trust--a truism throughout the ages--is to first deal through letters of credit and then move on to open account.  Traders for the better part of three centuries, I think the Chinese know this.  Of course, it might help to speed the process if bi-lateral trade agreement are negotiated specifying use of the Rrenminbi and chock full of attractive little bon-bons if signed, which the Chinese have been doing.  Now, I haven't any idea what Anita, baby, of The Bank is getting at nor what she has done to the SCMP or for that matter what the amount of Renminbi deposited in The Bank in Hankers has to do with anything when compaired to global issues but I'm willing to bet $HK100 with anybody that this time next year--wherever the peg may be--that we see a substantial increase in the amount of L/C trade in Yuan (it's easier to type) AND a move up from 12th place in Yuan open account transactions.  That being said, Larry was right to whack me upside the head for not telling the full tale and being too smug about my predictions.  Thanks, old friend, and for those of you out there he's full of insights and information as one of the finest emerging market gurus in the world.  I'll tell you how to get in contact if you are interested.


It was announced late today that coming next week it will be revealed how provisions of Dodd/Frank will be applied to Chief Executives for violations of Dodd/Frank.  Inasmuch as no one knows what Dodd/Frank says or means this should be good.  I have been given a sketchy heads-up but I think I'll wait to read it over the week-end.  I'm sure I'll be the only one doing that…by design.

Oh, great jobs report today.  Of course, there is this shadow of doubt as to whether it's real given the   "errors" of last year.  I'll give them the benefit of doubt but, with this mob...


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