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Why the renminbi cannot rival the dollar yet

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HUDSON LOCKETT: 2020 was a banner year for Chinese markets and the Chinese currency. Foreign investors poured billions into renminbi-denominated stocks and bonds. That’s good news for Beijing. It strengthens its position as a global financial power and advances one of its main long-term goals– for the renminbi to finally step out of the dollar’s shadow and become a global reserve currency in its own right. But achieving equal status to the dollar will require a change of mentality in Beijing, where there is a culture of hoarding power. For the renminbi to really match the prestige of the dollar, they will have to break that instinct and give up control.

The dollar has dominated international finance for decades. And America has enjoyed the so-called exorbitant privilege that comes with that. Because it always pays in its own currency, the US can’t really run out of cash. In the simplest terms, global demand for dollars means the country can always print more without a huge impact. That’s a key reason why America can run an enormous deficit without fear of default.

US companies also benefit from not having to worry about exchange rate risk since everything is priced in their home currency. Trade, commodities, finance, pretty much everything that matters in the global economy, and areas in which China wants a bigger say, is priced in dollars. But while China has started to rival the US in international affairs, the renminbi isn’t even close to having the pull of the dollar yet.

China is making headway in raising the renminbi status by opening up its stock and bond markets to foreign investors. China’s economic recovery from the COVID-19 pandemic has sent its stock market soaring and buoyed yields on onshore bonds, drawing in well over $100 billion from overseas investors searching for profits. However, while its capital markets may accept foreign money, they do so primarily through cross-border exchange programmes that link Chinese onshore stock and bond markets to those in Hong Kong. Those stock and bond connect schemes are specifically designed to welcome overseas investment while maintaining a limit on how much of China’s currency can flow out.

Investments from overseas can be withdrawn relatively easily. But Chinese investors are subject to much, much stricter rules. As a result, it doesn’t matter how much money China’s central bank prints. Only a tiny fraction can make its way offshore. And that arrangement helps Beijing maintain control over the renminbi’s exchange rate. But it also limits how much renminbi other countries can hoard, and therefore the currency’s global standard.

Swift data show the renminbi’s share of international transactions languishing at about 2%, still well below its 2015 peak of only 3%. And Hong Kong, which has its own currency and financial system but is politically a part of China, accounts for about 3/4 of those payments. This is, at least in part, by design.

Even though China is allowing more foreign cities to act as clearing centres for the renminbi, policymakers in Beijing are very reluctant to allow the currency to accumulate offshore. And for central banks, the dollar’s supreme importance remains a plain fact. IMF data show them holding on to about $230 billion worth of renminbi assets in their forex reserves compared to almost $7 trillion in US dollars.

Five years ago, Beijing appeared on track to rapidly internationalise the renminbi. But those efforts were complicated by the decision to maintain a soft peg to the US dollar. When the greenback surged, it took the renminbi along for the ride, making China’s exports less competitive just as the domestic economy was losing steam. That prompted the People’s Bank of China to weaken the renminbi with a one-off devaluation of almost 2% in the summer of 2015.

The stated purpose for the move was market reform, to allow the renminbi’s trading band, which is set every morning by the central bank, to take more cues from foreign exchange markets. But it spooked investors who cashed in their renminbi assets and sent the currency on a historic route. Unable to convince investors to stop selling and facing accusations it was flirting with a currency war, China imposed strict capital controls and throttled the renminbi market in Hong Kong in order to stabilise the currency.

Since 2015, China’s foreign exchange policy has become far more transparent and market driven. And few traders today live in fear of a devaluation like the one in 2015. But the exchange rate is far from free floating.

And so far, China’s capital account is still far from totally open. To have a truly global renminbi and all of the advantages that come with it, Beijing will have to let the currency go wherever market forces and its citizens want to take it. For now at least, that looks like a long way off.



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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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