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Renminbi rising
Categories: Justin Urquhart's Comment
George Osborne's efforts last week to try and establish London as the Western centre for the trading of the Chinese currency should be congratulated however, some of the headlines seemed to get a little enthusiastic over something which is going to be a far slower burn than a Chinese firework.
I am delighted that we have a politician (about whom I have often been quite critical) highlighting an area of business where we are not only highly experienced and capable but also a global leader. All too often we only seem to recognise these treasures after we have already lost them.
At a time of fashionable City and banker bashing, the critics should shut up and rejoice in our foreign exchange expertise where some 36.7% of global market turnover goes through the UK, with the US running a somewhat distant second. Thus setting out our stall to be the occidental centre of Renminbi trading is certainly a forward thinking move.
However, we need to put this into perspective as, so far, the global trading of this currency is still miniscule. As of 2010 China's share of global GDP was 13.6% and its share of global exports 10.6%. These are huge figures, and put against the Renminbi's share of global foreign exchange turnover, just underline how far this currency has to go - so far it is has a mere 0.45% turnover share! Compare that to the US$ which accounts for some 85% of FX turnover each day.
Nevertheless things are changing fast and the value of Chinese currency funds held in Hong Kong is growing exponentially and the corporate Chinese currency denominated corporate bond market although not as dramatic, is still attracting more interest. Last July the authorities created an offshore Renminbi and this is already being traded not just in Hong Kong but on the major trading floors back in London.
There is, though, one major blockage - the currency is not freely or readily convertible. Who realistically is going to be investing in a currency whose value is set by, or at least heavily influenced by, the central authorities? Until this happens this currency can never even consider being regarded as a viable alternative reserve currency to the dominant Dollar.
When full convertibility is set up and a real market value is established, only then will governments start to realistically retain significant Renminbi holdings. In the meantime the Chinese authorities will continue to draw up cross currency deals with other countries in an effort to bypass the US$ and reduce their dependence upon it.
Our historical ties are certainly there with two of our largest banks Standard & Chartered (Chartered established in 1853 - the Standard bit came later from its merger in Africa) and of course HSBC, established in 1865. Add to that a legal system still resonating with English Common Law and even a residual attitude towards corruption and fair trade which continues to make Hong Kong attractive.
That's the currency - but should in fact we go further? As we did to China with Hong Kong and created a regional investment centre, so perhaps we should try to do the same for the Chinese in Europe? Now I am not suggesting that we adopt some of the less attractive parts of our history that resulted in us gaining the part ownership and part lease of Hong Kong and the "new territories", (that is to say through our less than laudable efforts during the Opium wars with China) but rather by creating a financial free trade area of some structure might be imaginative.
My choice would be the Isle of Sheppey. No one would really notice and perhaps it would justify Boris' idea for an estuary airport?
No doubt London's competitors would fight any such move - but perhaps they should think again. London maybe the capital of the United Kingdom, but the City is a uniquely international and diverse operation which attracts business to Europe from all over the world. Thus to an outsider it would seem logical that you go to the point of expertise within Europe for your particular need and frankly have little regard for the petty partisan views of the bickering locals.
It seems that credit ratings just "ain't what they used to be", and thus the remaining countries with AAA ratings could easily be described as the nervous nine - although some deserve to be more nervous than others. These nine as judged by Fitch, Moody's and Standard & Poor's include Singapore, Switzerland, Sweden, Australia, Canada, Denmark, Norway, Germany and the UK. I think by most of their measures the likes of Norway and Singapore can be very confident of their rating, but some of the others should not be lulled into any sense of complacency, especially after the night of the long knives last Friday. What was more interesting was not the number of nations being scythed by S&P, but some of the language that accompanied it.
After all the weeks during which the agencies had been calling for greater actions to control debt and deficit, suddenly the tone seemed to turn to one of growth. This almost has the resonance not of an independent rating agency evaluating risk, but rather a non regulated body implying economic and political policy. Does this not make a blurred line between demand for austerity versus growth and one which only serves to confuse the politicians?
What was interesting was the extent to which many of the markets have ignored S&P's changes - especially as they have not as yet been followed by any of the others.
I wonder if anyone can rate the credit rating agencies - for professionalism - for integrity - for responsibility of their actions.
I love the phrase from a credit rating agency that "this bank has an AAA rating with a stable outlook", it sounds like a well run bank in Bethlehem.
I also see that the Greek authorities have announced that we can now rent the Acropolis for some €1600 a day? Nice place for a party?
And finally ... a lesson in never ignoring that job lot of stuff you occasionally get offered. A Russian villager discovered a stockpile of Kalashnikov assault rifles hidden in the wooden crates he bought for $15 (£9.81) from a stranger to use as fuel for his winter stove.
A total of 79 guns and 253 cartridges were stuffed in more than 60 wooden boxes bought by a resident of the village of Sovkhozny in Udmurtia, a region some 1,300 km South-East of Moscow.
The 57-year old local resident said he bought them from a random truck driver to heat his home.
The fully functional rifles, produced in 1959-1960, were on their way to a recycling plant, when they wound up in the man's possession. Russia's Deputy Prime Minister Dmitry Rogozin said he will launch a probe into the mysterious appearance of automatic rifles.
A deadly mixture of corner cutting and negligence continues to plague Russia's defence industry 20 years after the fall of the Soviet Union, with Russia still the world's second-largest arms exporter.
"I imagine how scared the West is of our nuclear arms," a Facebook user Oleg Zabara wrote in a comment on Rogozin's post. "Not because they exist, but because they could accidentally fall on them (by mistake), just like those rifles got to that old man."
How comforting!
Have a good week.
Justin Urquhart Stewart
Director
Seven Investment Management
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