Dark Skinny

From Bloomberg
By Tom Kohn and Bryan Keogh

President Barack Obama can look to China’s corporate bond market for evidence Premier Wen Jiabao is opening up his currency to the world.

Sales of non-financial bonds rose to a record 199 billion yuan ($29.1 billion) this year, making it the third most popular currency for company debt behind the U.S. dollar and euro. The market overtook offerings in Japanese yen for the first time after being ranked sixth in 2007, according to data compiled by Bloomberg.

During last year’s presidential campaign, Obama said in a letter to the National Council of Textile Organizations that Chinese “manipulation” of the yuan creates a reliance on exports that hurts the U.S. and global economies. While denying the charge, China in December promised to open capital markets and is also easing rules limiting foreign banks’ role in bond sales and trading.

“A sizable and vibrant domestic corporate bond market is a precondition” for the yuan to become an international currency, said Shang-Jin Wei, professor of Chinese business and economy at Columbia University’s Graduate School of Business in New York.

While attacking the dollar’s dominant role in global finance, China is boosting its currency by bolstering the corporate bond market and making it easier to do business in yuan.

Since November, the world’s third-largest economy has set up 650 billion yuan in so-called currency swaps to help importers in Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea avoid having to pay dollars for Chinese goods.

‘Hugely Liquid’

Record bond issuance and loosened regulations have persuaded at least six overseas investment banks, including New York-based Goldman Sachs Group Inc. and UBS AG of Zurich, to start underwriting local-currency debt.

“It’s a hugely liquid market,” said Joseph Chee, head of capital markets at UBS Securities Co. in Beijing, who forecasts securities sales, including those of corporate bonds and short- term paper, will jump about 50 percent to 1 trillion yuan this year. “It will continue to grow.”

The pace of expansion provides “a striking contrast between the health and growth of financial markets in China and the condition of markets in the West, which are still struggling,” said Mark Williams, an economist at London-based Capital Economics Ltd. who advised the U.K. Treasury on China from 2005 to 2007.

China is using a 4 trillion-yuan stimulus plan to bolster capital markets by encouraging infrastructure spending and boost growth above last quarter’s 6.8 percent, the weakest in seven years. That’s attracting European and U.S. banks as they grapple with recession at home and $1.25 trillion of losses and writedowns triggered by the collapse of the mortgage market.

State Support

The $256 billion of Chinese corporate notes outstanding are dwarfed by $1.96 trillion in government debt as of Dec. 31, according to the Asian Development Bank.

China’s currency has gained 21 percent against the dollar since a fixed peg to the greenback was scrapped in 2005. The country’s central bank now manages the yuan against a basket of currencies, including the dollar, euro and yen.

The yuan traded at 6.84 to the dollar yesterday.

Government support for state-controlled banks, the yuan’s managed exchange rate and regulations curtailing foreign companies from buying or selling local securities are limiting growth in the corporate debt market, according to Nicholas Lardy, an economist specializing in China at the Peterson Institute for International Economics in Washington.

‘Super-Sovereign’

Still, Wen has ambitions to play a bigger role in global financial markets. While stopping short of promoting the yuan as a replacement for the dollar, Central bank Governor Zhou Xiaochuan said in March that the International Monetary Fund should create a “super-sovereign reserve currency.”

Zurich-based Credit Suisse Group AG and Deutsche Bank AG of Frankfurt won licenses for joint ventures with Chinese securities firms since December, joining Goldman Sachs, Morgan Stanley, UBS and CLSA Asia-Pacific Markets in starting local partnerships.

The $29.1 billion of yuan-denominated company debt issued this year compares with bond sales of 16.6 billion pounds ($24.4 billion) and 1.79 trillion yen ($17.9 billion), Bloomberg data show.

Dollar-denominated debt sales totaled $201 billion while offerings in the European currency reached 109 billion euros ($144.7 billion).

Underwriting Licenses

China National Petroleum Corp., the country’s biggest oil producer, sold 20 billion yuan of bonds on Oct. 27, Dec. 11 and March 20 in the nation’s biggest corporate offerings. The 2.25 percent the Beijing-based company paid on the March notes, due 2012, is 4.25 percentage points less than the coupon that South Korea-based Hana Bank was charged for similar-maturity government-backed debt in dollars this month.

Credit Suisse in December said China granted it permission to underwrite shares and bonds. The bank’s local affiliate, Credit Suisse Founder Securities Ltd., this year helped Shaoxing Water Group Co., Peking University Founder Group Corp. and Lin’an City Urban Construction Development Co. raise a combined 3.1 billion yuan.

Deutsche Bank won approval in January to underwrite bonds through Zhong De Securities, a Beijing-based venture with Shanxi Securities Co. Morgan Stanley has a 34 percent stake in China International Capital Corp., the second-biggest underwriter of non-financial corporate debt last quarter and one of only two brokers permitted to underwrite medium-term note sales.

‘Enormous Demand’

“The government is trying to get more capital into state- owned enterprises and companies in China generally,” said Chris Keogh, managing director of Gao Hua Securities Co. in Beijing, New York-based Goldman Sachs’s partner. “We’re seeing enormous demand from companies who want to issue.”

Companies in China, Japan, South Korea and Taiwan face higher refinancing risks than peers in the rest of Asia-Pacific because they’re “over-reliant” on bank loans to meet debt obligations, Fitch Ratings said in a March 18 report.

China must open the debt market to foreign investors and loosen capital controls if it wants the yuan to take a bigger role in global finance, said Brad Setser, a former Treasury official and Council on Foreign Relations economist in New York.

“It’s hard to have a more global currency if you don’t let foreigners own your debt as an asset,” Setser said.

Foreign Borrowers

China is increasing the amount of domestic securities overseas funds can buy under the qualified foreign institutional investor program. Standard Chartered Plc, the U.K.’s second- largest bank by market value, said April 7 that its local unit became the first foreign-owned lender to trade Chinese corporate debt after a commercial-paper transaction.

As authorities ease restrictions, foreign companies with operations in China may find the yuan bond market useful for raising cash, Columbia’s Wei said. Regulators may begin to allow such international issuers within two or three years, Keogh of Gao Hua forecasts.

For now, the global credit crisis is hindering banks’ ability to garner more market share, said Michael Pettis, a finance professor at Peking University.

“They’re dealing with much bigger problems, and a number of them are looking to get out of their Chinese investments,” he said. “I don’t really see a gold rush going on here yet.”

Li Pumin, policy research director of the planning ministry responsible for China’s bond sales, declined to comment. Ma Jihua, the National Development and Reform Commission deputy fiscal and financial affairs director governing corporate debt, couldn’t be reached for comment.

Wen said last month that China must speed up financial changes to combat the financial crisis. “We can’t slow down the process of reforms,” the premier told a press conference after the close of the annual parliament session. “Instead, we would rather speed up.”

In at least a dozen recession-strapped communities throughout America, the US Dollar has been superceded by local “coupon” currencies, denominated in $1, $5, $20 and $50 amounts to help assist in the flow of cash within these communities.

In an interesting article in USA Today, the local people can buy this currency - the way it works is that shoppers purchase this currency at a discount - say 95 cents for a dollar’s worth - and spend the full value within their own communities without a problem. They can also cash in this new currency at their local community bank to reclaim its  dollar value. These new local currencies have their own local names like BerkShares, Plenty and Cheers.

From USA Today
By Marisol Bello

Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.

Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash.

“We wanted to make new options available,” says Jackie Smith of South Bend, Ind., who is working to launch a local currency. “It reinforces the message that having more control of the economy in local hands can help you cushion yourself from the blows of the marketplace.”

About a dozen communities have local currencies, says Susan Witt, founder of BerkShares in the Berkshires region of western Massachusetts. She expects more to do it.

Under the BerkShares system, a buyer goes to one of 12 banks and pays $95 for $100 worth of BerkShares, which can be spent in 370 local businesses. Since its start in 2006, the system, the largest of its kind in the country, has circulated $2.3 million worth of BerkShares. In Detroit, three business owners are printing $4,500 worth of Detroit Cheers, which they are handing out to customers to spend in one of 12 shops.

During the Depression, local governments, businesses and individuals issued currency, known as scrip, to keep commerce flowing when bank closings led to a cash shortage.

By law, local money may not resemble federal bills or be promoted as legal tender of the United States, says Claudia Dickens of the Bureau of Engraving and Printing.

“We print the real thing,” she says.

The IRS gets its share. When someone pays for goods or services with local money, the income to the business is taxable, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. “It’s not a way to avoid income taxes, or we’d all be paying in Detroit dollars,” he says.

Pittsboro, N.C., is reviving the Plenty, a defunct local currency created in 2002. It is being printed in denominations of $1, $5, $20 and $50. A local bank will exchange $9 for $10 worth of Plenty.

“We’re a wiped-out small town in America,” says Lyle Estill, president of Piedmont Biofuels, which accepts the Plenty. “This will strengthen the local economy. … The nice thing about the Plenty is that it can’t leave here.”

The G20 meet has been hailed as a great success, where much was achieved and where all the powers came to unhindered agreement. But the truth is that President Obama did not get his extra bailout spend from Europe, and Europe only got vague promises concerning her demands for sterner, deeper global financial regulation. The real outright winners were the emerging market countries.

To me, the result and outcome of this G20 meet points to one thing. With a sudden and unexpected huge donation of $1 trillion to the IMF fund - under the guise of “…helping under-developed countries”, with further agreement that the head of the IMF will no longer always be a European and the chair of the World Bank will no longer be headed by an American - these key positions, in the future, will probably be held by  a Brazilian and a Chinaman respectively. With these seemingly discreet changes and concessions, there has been a prominent dilution of European and American power at the global financial table. And, very apparently, the dollar will eventually be phased out and succeeded by the IMF SDRs as the main trade currency which, in the article below, is defined as “…a world currency in waiting”.

By Ambrose Evans-Pritchard
UK Telegraph

A single clause in Point 19 of the communiqué issued by the G20 leaders amounts to revolution in the global financial order.

“We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity,” it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century.

In effect, the G20 leaders have activated the IMF’s power to create money and begin global “quantitative easing”. In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body. Conspiracy theorists will love it.

It has been a good summit for the IMF. Its fighting fund for crises is to be tripled overnight to $750bn. This is real money.

Dominique Strauss-Kahn, the managing director, said in February that the world was “already in Depression” and risked a slide into social disorder and military conflict unless political leaders resorted to massive stimulus.

He has not won everything he wanted. The spending plan was fudged. While Gordon Brown talked of $5 trillion in global stimulus by 2010, this is mostly made up of packages already under way.

But Mr Strauss-Kahn at least has resources fit for his own task. He will need them. The IMF is already bailing out Pakistan, Iceland, Latvia, Hungary, Ukraine, Belarus, Serbia, Bosnia and Romania. This week Mexico became the first G20 state to ask for help. It has secured a precautionary credit line of $47bn.

Gordon Brown said it took 15 years for the world to grasp the nettle after Great Crash in 1929. “This time I think people will agree that it has been different,” he said.

President Barack Obama was less dramatic. “I think we did OK,” he said. Bretton Woods in 1944 was a simpler affair. “Just Roosevelt and Churchill sitting in a room with a brandy, that’s an easy negotiation, but that’s not the world we live in.”

There will be $250bn in trade finance to kick-start shipping after lenders cut back on Letters of Credit after September’s heart attack in the banking system. Global trade volumes fell at annual rate of 41pc from November to January, according to Holland’s CPB institute – the steepest peacetime fall on record.

Euphoria swept emerging markets yesterday as the first reports of the IMF boost circulated. Investors now know that countries like Mexico can arrange a credit facility able to cope with major shocks – and do so on supportive terms, rather than the hair-shirt deflation policies of the old IMF. Fear is receding again.

The Russians had hoped their idea to develop SDRs as a full reserve currency to challenge the dollar would make its way on to the agenda, but at least they got a foot in the door.

There is now a world currency in waiting. In time, SDRs are likely evolve into a parking place for the foreign holdings of central banks, led by the People’s Bank of China. Beijing’s moves this week to offer $95bn in yuan currency swaps to developing economies show how fast China aims to break dollar dependence.

French President Nicolas Sarkozy said the summit had achieved more than he ever thought possible, and praised Gordon Brown for pursuing the collective interest as host rather than defending “Anglo-Saxon” interests. This has a double-edged ring, for it suggests that Mr Brown may have traded pockets of the British financial industry to satisfy Franco-German demands. The creation of a Financial Stability Board looks like the first step towards a global financial regulator. The devil is in the details.

Hedge funds deemed “systemically important” will come under draconian restraints. How this is enforced will determine whether Mayfair’s hedge-fund industry – 80pc of all European funds are there – will continue to flourish.

It seems that hedge funds have been designated for ritual sacrifice, even though they played no more than a cameo role in the genesis of this crisis. It was not they who took on extreme debt leverage: it was the banks – up to 30 times in the US and nearer 60 times for some in Europe that used off-books “conduits” to increase their bets. The market process itself is sorting this out in any case – brutally – forcing banks to wind down their leverage. The problem right now is that this is happening too fast.

But to the extent that this G20 accord makes it impossible for the “shadow banking” to resurrect itself in the next inevitable cycle of risk appetite, it may prevent another disaster of this kind.

The key phrase is “new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times.” This is more or less what the authorities agreed after the Depression. Complacency chipped away at the rules as the decades passed. It is the human condition, and we can’t change that.

In articles within Forbes , Busness Week, and Seeking Alpha, it appears that China has been wasting little time establishing her yuan currency globally.  China has just completed $10 billion in currency swaps in a recent deal with  Argentina.  As well, China has already established bilateral currency swap agreements with Indonesia, Malaysia, Hong Kong, South Korea and Belarus over the last few months to the tune of $95 billion dollars. Establishing these swaps avoids the necessity to use dollars within trade transactions and is a very fast way to establish the yuan as a useful, leading currency. Notably, all the countries that China has extended swaps to are mostly important suppliers of food or raw materials and all are emerging market countries. And by extending these yuan credit swaps, China is clearly looking to both protect and extend her own import/export markets while, at the same time,  attempting  to revive slumping global trade.

“China is affected a lot when the dollar is up and down. Everyone is looking for balance and self-protection,” Zuo Xiaolei, chief economist for Galaxy Securities in Beijing, told the AP. “How can China protect its own interests in the current economic situation? You can’t change the U.S., so you can only change yourself.”

“Dollars will not be needed for trade,” the Communist Party newspaper People’s Daily said. “This measure will play a positive role in improving regional currency stability, preventing financial risk and reducing the spread of the crisis at this extraordinary time when the financial crisis is growing daily.”

Last week, China Central Bank chief Zhou Xiaochuan called for a new global currency to replace the dollar. Zhou maintains that the unique status of the dollar as the world reserve currency has significantly contributed to the global financial crisis since the collapse of Breton Woods in 1971.

“The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies,” Zhou said. “Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.”

Zhou has called for the re-establishment of a new credit-based world reserve currency, which is based on the Special Drawing Rights(SDR) of the IMF.

“The SDR has the features and potential to act as a super-sovereign reserve currency,” said Zhou. “Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation.”

Only recently, Premier Wen Jiaobao has similarly expressed his concern over the dollar ’s instability and volatility:

“We have lent a huge amount of money to the United States,” Wen said. “Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

“We have already adopted a guiding management policy of diversifying our foreign exchange reserves, and at present our foreign exchange reserves are safe overall,” Wen said. “Our first principle in managing foreign currency is averting risk. We have always adhered to the principles of foreign currency security, liquidity and maintaining value, and implemented a strategy of diversification.”

World Bank President Robert Zoellick came to the defense of the dollar in a recent interview with Reuters:

“I think the dollar will remain the principle reserve currency. The question will be whether you have complementary measures,” Zoellick said. “It is appropriate to discuss the monetary system but one also has to be sensible and not throw out the baby with the bath water.”

“To create a reserve currency you need to have more than a summit or a meeting, you have to create financial markets where people feel comfortable moving in and out of the currency,” he added. Zoellick also said that China’s contribution to the debate has been a positive development that shows its engagement and willingness to participate in the international financial system.

Today, the Russians announced that their newly proposed SDR world reserve currency should also include a new commodity within this proposed currency basket - Gold. This proposal would indeed make the currency more stable but, notably, both Russia and China are major producers of gold now. This new gold-backed reserve currency would also help to  stabilize other currencies by preventing any influence or manipulations from governments using  any one dominant currency within both the currency and commodity  markets(as happens now) and should, therefore, make the system fairer.

So far we have had a UN expert economic panel, China and Russia all recommending that the world reserve dollar be replaced by an SDR basket of currencies(via the IMF) with no one currency as king. And perhaps  it was inevitable that gold  - that “barbaric relic” as some would have it - should be included in this new basket of currencies.

More will surely be known after the G20 meet.

Here is the main article source:

By Ambrose Evans-Pritchard
From the UK Telegraph

Arkady Dvorkevich, the Kremlin’s chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.

Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.

Mr Dvorkevich said it was “logical” that the new currency should include the rouble and the yuan, adding that “we could also think about more effective use of gold in this system”.

The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending. It collapsed in the 1930s when the British Empire, the US, and France all abandoned their parities.

It was revived as part of fixed dollar system until US inflation caused by the Vietnam War and “Great Society” social spending forced President Richard Nixon to close the gold window in 1971.

The world’s fiat paper currencies have lacked any external anchor ever since. It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible - or less likely - under the discipline of gold.

Russia is a major gold producer with large untapped reserves of ore so it has a clear interest in promoting the idea. The Kremlin has already instructed the central bank of gradually raise the gold share of foreign reserves to 10pc.

China’s government has floated a variant of this idea, suggesting a currency based on 30 commodities along the lines of the “Bancor” proposed by John Maynard Keynes in 1944.

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Related References:

Russia & China openly call for new World Reserve Currency

Dollar Shock!! UN Panel Says World Should Ditch the Dollar

The Future of Gold

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