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China Great Economic Ambition; The Maritime Silk Road and Yuan The New Reserve Currency

Editor

Ronnie Higuchi Rusli




President Xi Jinping statement would implies that trade with the United States, the European Union and the rest of the West is not the priority it use to be for China. Today the SCO (aka the Asian NATO), chaired by Russia and driven by China, has been ramping up its attention towards expansion and economic cooperation among its members.

SCO Originally founded as the 'Shanghai Five' in 1996 it was reformed as the Shanghai Cooperation Organization (SCO) with the addition of Uzbekistan in 2001. The SCO is now an economic and security cooperation group consisting of six Central Asian countries: China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan. Next year 2015, India, Pakistan and Iran, will became full membership, thus SCO will consist of 9 member countries.

Mongolia and Afghanistan are observers, while Belarus, Turkey and Sri Lanka are dialogue partners. At the end of 2013, the bloc had a combined economic output of over 11 trillion U.S. dollars - representing 14.9 percent of the global total. The SCO seems to be completely off gold investor's radar screens. It definitely shouldn't be because China (and Russia's) goal is to 'create an Asian security architecture independent of the United States and its allies.'

But the SCO, as China envisions it is so much more than just security - China is going to mould Genghis Khan's old stomping ground into a new economic bloc. A single cohesive market with a shared security blanket that will eventually encompass over four billion people. The infrastructure and economic corridors have already been planned for and in many cases have been successfully implemented and built...

Last year 2013, China devised a 'New Silk Roads' policy to enhance trading connectivity with neighbouring countries. This policy has two components: a 'Silk Road Economic Belt' for land connectivity initially with Central Asia and a '21st century Maritime Silk Road' to connect China with ASEAN and, ultimately, with the coastal cities of South Asia as well.

China's actions have led to the revival of the Northern Silk Road. Cities in inner provinces such as Kunming, Chongqing, Chengdu, Xi'an and Xining have emerged as major metropolitan cities with urban infrastructure projects paralleling those in coastal areas. China has built an east-west railway line to connect far-flung cities like Urumqi and Kashgar to Xi'an and the coastal cities. This railway line has been extended to Moscow, using Central Asia as an economic corridor, and then on to Duisburg (in Germany) to become the China-Europe railway line. East-west pipelines such as the Kazakhstan-China, Iran-China, and Central Asia-China pipelines have also been built.

In conjunction with India, which is actively implementing its 'Look East' policy, China is building the BCIM Economic Corridor to connect the Yunnan province of China with Myanmar, Bangladesh and India. This is an important segment of the less well-known Southern Silk Road.

In June 2014, the Chinese Ambassador to New Delhi, Wei Wei, proposed the establishment of a 'Trans-Himalaya Economic Growth Region (THEGR)' to promote the interconnection and joint prosperity of China and India and neighbouring countries. As with many such proposals from China, details are not known as yet. Nonetheless, the proposal is welcome as it addresses an important missing link in connectivity in the region." ~ eastasiaforum.org

Golden Dragon

In 2013 China was officially crowned as the world's largest gold market accounting for around a third of global gold demand. Consumer demand soared 32 percent to 1,066 tonnes (up 160% from five years ago) of gold in the form of bars, coins and jewelry topping India's 2010 record of 1,007 tonnes. Nonetheless, India has once again overtaken China as the world's biggest gold consumer, buying 225.1 tonnes of gold jewellery, coins and bars Q3 2014, compared to 182.7 tonnes in China.

China is the world's top producer of gold, mining 437 tonnes in 2013, with the largest annual increase globally for 2013. Gold production in China, over the last decade, has more than doubled as the country produced 6,827,000 ounces of gold in 2004. In 2014, gold production estimates are expected to be around 14.5 million ounces. The Chinese keep all of the gold they mine and the export of gold bullion is banned.

Silk Road Economic Belt, Maritime Silk Road

In May of 2014 China's state-owned Xinhua News Agency unveiled an ongoing feature entitled New Silk Road, New Dreams. According to the map, the land-based "New Silk Road" will begin in Xian in central China before stretching west through Lanzhou (Gansu province), Urumqi (Xinjiang), and Khorgas (Xinjiang), which is near the border with Kazakhstan. The Silk Road then runs southwest from Central Asia to northern Iran before swinging west through Iraq, Syria, and Turkey. From Istanbul, the Silk Road crosses the Bosporus Strait and heads northwest through Europe, including Bulgaria, Romania, the Czech Republic, and Germany. Reaching Duisburg in Germany, it swings north to Rotterdam in the Netherlands. From Rotterdam, the path runs south to Venice, Italy -- where it meets up with the equally ambitious Maritime Silk Road.


The Maritime Silk Road will begin in Quanzhou in Fujian province, and also hit Guangzhou (Guangdong pronvince), Beihai (Guangxi), and Haikou (Hainan) before heading south to the Malacca Strait. From Kuala Lumpur, the Maritime Silk Road heads to Calcuta, India then crosses the rest of the Indian Ocean to Nairobi, Kenya (the Xinhua map does not include a stop in Sri Lanka, despite indications in February that the island country would be a part of the Maritime Silk Road). From Nairobi, the Maritime Silk Road goes north around the Horn of Africa and moves through the Red Sea into the Mediterranean, with a stop in Athens before meeting the land-based Silk Road in Venice.

The maps of the two Silk Roads drive home the enormous scale of the project: the Silk Road and Maritime Silk Road combined will create a massive loop linking three continents. If any single image conveys China's ambitions to reclaim its place as the "Middle Kingdom," linked to the world by trade and cultural exchanges, the Xinhua map is it. Even the name of the project, the Silk Road, is inextricably linked to China's past as a source of goods and information for the rest of the world.

China's economic vision is no less expansive than the geographic vision. According to the Xinhua article, the Silk Road will bring "new opportunities and a new future to China and every country along the road that is seeking to develop." The article envisions an "economic cooperation area" that stretches from the Western Pacific to the Baltic Sea." ~ Shannon Tiezzi, China's 'New Silk Road' Vision Revealed, The Diplomat

Internationalization of the Chinese currency

Since the late-2000s, the People's Republic of China (PBC) has sought to internationalize its official currency, the Yuan/Renminbi (RMB). The RMB Internationalization accelerated in 2009 when China established dim sum bond market and expanded Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity. By 2013, the RMB is the 8th most traded currency in the world. As of May 24, 1.47% of world payments was settled in RMB, which ranked RMB as the 7th most traded currency in the world."

China's global economic integration is no longer limited to trade, but is fast spilling over into the realm of finance. The establishment of the Shanghai FTZ is expected to provide a boost to the city's ambitions of becoming a full-fledged international financial center by 2020. While the FTZ was formally approved in August this year, the draft plans pointing towards full convertibility of the RMB (with other major currencies) within Shanghai were revealed more recently. This comes on top of other plans to liberalize trade, interest rates and the establishment of foreign and joint venture banks in the Shanghai FTZ. Already, foreign banks such as HSBC, Standard Chartered and Citibank have expressed interest in setting up branches in the Shanghai FTZ.

Importantly, the success of allowing RMB convertibility within the Shanghai FTZ will enable the Chinese government to gradually liberalize the RMB at the national level. This is in line with its plans to make the RMB a global reserve currency, with Shanghai potentially becoming a major center for RMB trade. However, plans to liberalize currency controls within the Shanghai FTZ are merely part of an overarching RMB strategy.

As early as 2004, China had tapped Hong Kong to become an offshore RMB center, designating the Bank of China Hong Kong as an RMB clearing bank. This was followed by announcements in 2009 that London would follow suit. By mid-2012, both Hong Kong and London had become offshore RMB centers catering to a variety of institutions and enterprises. Singapore was next in 2013, with the Industrial and Commercial Bank of China designated as the RMB clearing bank in the city-state. Plans to liberalize currency controls within the FTZ suggest that Shanghai will become the fourth city to facilitate the RMB's internationalization, albeit as an onshore center.

Through the establishment of the three offshore RMB centers and full RMB convertibility in Shanghai, China can now encourage RMB use in several key markets. First, London provides an important bridge to European markets. Similarly, Singapore connects the emerging Southeast Asian economies to RMB funds and trade settlements. Given Hong Kong's highly internationalized financial sector, it plays a particularly important role in connecting China to the rest of the world. This is a role that will be shared by Shanghai, with its pending emergence as an international financial center. As such, these four cities represent nodes through which China can expand its participation in global financial markets and encourage RMB trade and use.

The International Monetary Fund (IMF) is going to review the composition of its Special Drawing Right (SDR) monetary unit. It's very possible that since the Chinese currency has met a sufficient number of standards for convertibility it will be become one of the constituent parts of the SDR, joining the dollar, the euro, yen and sterling.


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