Monthly Archives: May 2009

By Arthur Kroeber

One baleful consequence of the global financial crisis has been a swarm of ill-informed commentary about the decline of the US and the dollar, and the rise of China and the renminbi. Such hyperbolic claims about a tectonic shift in global power relations are bunkum.

Since last November, the People’s Bank of China has initiated more than $100bn in renminbi swap lines with various other central banks, mainly in the developing world. There also has been lots of noise about increasing the use of renminbi in regional trade transactions.

These developments have led many to speculate that China aims to make the renminbi a major global currency, and that it is just a matter of time before the currency of the world’s largest creditor supplants that of the world’s biggest debtor as the major global reserve asset.

On the potential for the renminbi itself as a reserve currency, commentators frequently confuse three distinct concepts: currency internationalisation, reserve currency, and dominant global reserve currency.

By Tom Miller

They may not be as sexy as their Martini-sipping namesake, but bonds are important. A properly functioning bond market helps allocate capital efficiently and allows central bankers to set appropriate interest rates.

But the stunted Chinese bond market has long been a weak link in China’s bank-dominated financial system.

Two years ago, when Beijing ditched a quota system that limited annual corporate bond issuances to Rmb100bn and required that all bonds be underwritten by state-owned banks, hopes were high that the corporate bond market would spark into life. The new regulations were expected to give a new funding avenue to listed companies with weaker links to the state, and provide all listed companies with access to cheaper credit.

After a good start, however, corporate bond issuances, or gongsi zhai, fizzled this year: issuance in the first four months was a round, fat zero.

But there are signs that the bond market is picking up elsewhere – namely under the guise of medium-term notes, or zhongqi piaoju. Mid-term note issuance reached Rmb280bn in January to April, 60 per cent more than total issuance in 2008.

At Galanz’s main factory in Shunde, an industrial town an hour’s drive south of Guangzhou, hundreds of blue-shirted young men bend over 200m-long trestle tables, drilling screws into a line of shiny new microwaves.

Galanz, a household name in China but still unknown in much of the world, makes one of every two microwaves found in households across the globe.

This scene, repeated in thousands of factories lining the Pearl River Delta in Guangdong province, is an example of what the “factory of the world” does best: marshalling millions of migrant workers to produce cheap consumer products in dizzying quantities. Galanz’s 47,000 workers have the capacity to produce 28m microwaves per year.

But if countless media reports are to be believed, Galanz – along with thousands of other export processors in the PRD – should be in its death throes. With export markets collapsing across the developed world, thousands of manufacturers are teetering on the verge of collapse.

And with government statistics indicating that more than 60,000 factories shut their gates last year alone, armies of unemployed migrants are preparing to rampage across southern China, leaving destruction in their wake.

Dragonbeat is off on a tour of the Pearl River Delta this week, but will return with some thoughts next Monday.

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