Incredibly, the world witnessed a striking split-screen last week: US President Donald Trump addressed a joint session of Congress while Chinese Premier Li Qiang delivered his annual work report at the “two sessions” parliamentary meetings. One speech was met with heckling from the opposition and support from the speaker’s own party members, while the other received only the latter. Despite the stark contrast between the speeches from the two countries’ leadership, there seems to be a degree of wishful thinking in both countries’ internal discourse on their economic plans.
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I refer to the discussions around America’s re-industrialisation and yuan internationalisation. These discussions are not new, and the lingering of these talking points speaks more of their weaknesses rather than strengths. These two fairy tales have not faded away, morphing instead into nightmares haunted by the same villain: a broken, unbalanced global trading system made worse by misvalued currencies.
The renminbi will not become a major currency soon for a simple reason: you cannot buy much with it outside China. Much has been made about Saudi Arabia accepting yuan payments for its oil, with some proclaiming it the beginning of the end for US dollar hegemony.
Yet what exactly does Saudi Arabia do with the yuan it earns? Analysing this development, S&P Global noted in a report last year: “As the renminbi is not broadly used in international trade and finance, there are relatively few outlets to spend these proceeds.”
The kingdom, which exports more to China than it imports from it, could use some of the proceeds to pay for the goods it buys. But what’s left over will almost certainly be converted into US dollars to buy dollar-denominated assets, because for the non-Chinese, there are little to no viable yuan-denominated assets to buy outside China.
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What about inside China? Can a Saudi prince freely purchase say, prime real estate overlooking The Bund in Shanghai? Probably not. Foreigners in Shanghai must first work and pay taxes in the city for at least a year to be allowed to buy real estate – and there are similar restrictions across China, not just for property and but also for other assets. Chinese citizens also face restrictions in moving large amounts of yuan out of the country.