Currency swap agreement - China and the European Union

In fact in a globalised world there is simply no alternative to increase competitiveness. Reforms are essential. We either accept the challenge or Europe will surrender unconditionally to Asia. Merkel's medicine may be bitter but it will allow us Europeans to survive. Those who produce innovative goods with high quality will keep their standard of living, while those who produce average and simple goods will have to lower theirs and compete by price. This is surely hard to swallow but is inevitable, I am afraid. For the eight years from 2003 to 2011, the emerging markets looked like the developed world on speed, magnifying its performance in both directions and in aggregate outperforming by a significant margin. But since 2011, emerging markets have underperformed by so much that my contrarian antennae are starting to twitch. And Im not alone. Whether you compare companies share prices in these markets to the book value of their assets or to share prices in the developed world, they have hardly been cheaper in the past 20 years. I think there are some good reasons for this. While Im tempted by the valuation case for emerging market equities I think the last two years underperformance is set to persist. The golden age wont be back for a long time to come. Ten years ago the stars were aligned for emerging markets. China had joined the global economy, boosting its productivity and acting as a magnet for other developing countries. On the back of this, commodity prices were rising. Inflation was subdued. Countries brought low during the late 1990s balance of payments crisis had paid down their debts and real interest rates had been falling for years. Best of all, valuations implied a huge emerging market risk premium. Roll forward a decade and none of these apply. China has emerged. Its shift to a consumption-driven economy means the outlook for commodities is poor. Inflation is unlikely to fall further while some countries that learnt restraint after the Tiger economy crisis have fallen off the wagon and are running current account deficits. Valuations are cheaper than they were but not excessively so. Most damagingly, the direction of travel for US yields is clearly up. That means the past five years positive capital flows, appreciating currencies and falling interest rates are about to go into reverse. Currencies in the developing world will continue to fall, rates will have to

rise and the adjustment will in many cases be very painful. That wont be good news for emerging market equities and relatively speaking they are likely to underperform. China and the European Union signed a currency swap agreement to boost trade and financial stability in a move that also marks a landmark step for the Yuans internationalization. The three-year swap line with a maximum value of 350 billion Yuan ($57 billion) is the largest the People's Bank of China has signed with a foreign central bank outside of Asia, higher than the 200 billion Yuan agreement with the Bank of England. The People's Bank of China said in a statement that the deal can help provide liquidity support for the Yuan market in Europe and promote overseas use of the a different world currency. It is also beneficial for facilitating trade and investment. Experts said that the agreement with the European Central Bank is a significant step forward for the internationalization of the Yuan and is a reflection of the increasing demand for the Chinese currency in financial transactions in the eurozone. "The amount of the currency swap is significant, and it is an important step to develop the renminbi said Philippe Mongars, deputy director of the market operation department at the Bank of France. "All the banks based in the euro area will benefit from it and we see it as a backstop to maintain confidence in the Chinese currency in the euro area," he said. The renminbi (RMB) (simplified Chinese: ; traditional Chinese: ; pinyin: rnmnb; literally "people's currency") is the official currency of the Peoples Republic of China. The Yuan (/) (sign: ) is the basic unit of the renminbi, but is also used as a synonym of the currency, especially in international contexts the ISO 4217 standard code for renminbi is CNY, an acronym of Chinese Yuan. (A similar case is the use of the terms sterling and pound to designate the British currency and unit.) One Yuan is subdivided into 10 jio (), and a jio in turn is subdivided into 10 fn (). Renminbi banknotes are available in denominations from 1 jiao to 100 yuan (0.1100) and coins have denominations from 1 fen to 1 Yuan (0.011). Thus some denominations exist in both coins and banknotes. Coins under 0.1 are used infrequently . Renminbi is legal tender in mainland China, but not in Hong Kong, Taiwan, or Macau. Renminbi is sometimes accepted in Hong Kong and Macau, and are easily exchanged in the two territories, with banks in Hong Kong allowing people to maintain accounts in RMB. The currency is issued by the People's Bank of China, the monetary authority of China transactions in the euro area." Source : wikipedia.org

Chinese investment in Europe has grown rapidly, but for China to become a successful and mature investor in the old continent requires more time
"We think that China's foreign investment and investment in Europe is an activity that combines economic, social and cultural factors. "The success of this investment doesn't depend only on financial strength," said Ma She, deputy director-general of the department of European affairs at the Ministry of Commerce. Ma commented during the "Go To Europe" Investment Forum held by the China Public Diplomacy Association in Shanghai. Ma said he believes that integrating in foreign markets is a big obstacle Chinese investors face, because successful investment is based on an investor's understanding 2

of the local environment. Chinese corporate investment in Europe soared in recent years. Prior to 2008, the nation's annual investment in Europe was less than $1 billion, but by 2011 it had increased to $10 billion. By 2020, China's total investment in the region is expected to reach $250 billion to $500 billion. Qi Mei, counselor from the department of European affairs at the Ministry of Foreign Affairs, said Chinese enterprises investing in Europe face tough problems and obstacles. "What is also important to bear in mind is that the arrangement is bilateral so it is also a reassurance for banks in China when they need to access the euro," he added. The European Central Bank said in a statement that the agreement has been established in the context of rapidly growing trade and investment between the eurozone and China. The swap is intended to serve as a backstop facility to ensure the Yuans liquidity and financial stability in the eurozone. "The agreement showed that the ECB is very interested in contributing strongly to the internationalization of the renminbi," said Arnaud de Bresson, chief executive of Paris EuroPlace, a professional association that promotes Paris as an international financial center. De Bresson said that the swap is likely to significantly boost the Yuan-denominated bond market in Europe and will help consolidate Paris' position as a major platform for Yuan trading and transactions in the eurozone. Paris played a leading role in pushing the European Central Bank to sign the agreement as France has been keen on developing its capital into a major Yuan trading center. Yuan deposits in Paris amount to 10 billion Yuan, making the French capital the second-largest pool for the Chinese currency in Europe after London. Nearly 10 percent of Sino-French trade is settled in Yuan, according to the French Central Bank. Since 2008, China has signed currency swap agreements with 23 regions and countries with the total value reaching 2.48 trillion Yuan, according to the People's Bank of China. Good China-German ties also have brought benefits to both countries, he added. Germany is China's largest trading partner in Europe, while China is Germany's largest trading partner in the Asia-Pacific region. The two-way trade volume reached an unprecedented $161.13 billion in 2012, making up 29.5 percent of China-EU trade. Statistics show that there are more than 7,900 approved projects of German investment in China, the volume of which stands at more than $20 billion. The trade and investment figures show a relationship of mutual dependence between the Chinese and German economies, said Mei. China's rapid strides toward industrialization, informatization, urbanization and agricultural modernization, together with its unswerving commitment to an opening-up policy, offers German enterprises golden opportunities and will thus further strengthen bilateral economic ties, Xinhua News Agency said in a commentary published this month. Frequent exchanges of high-level visits between China and Germany have deepened trust, unlocked enormous potential for economic cooperation and gathered great momentum for the development of the China-Germany partnership, said Xinhua. "China's development cannot proceed without Germany either, because as an industrialized Western country, it has enormous leading know-how and valuable experience of development, which China needs," Mei said.

A positive example for China-Europe cooperation

As far as Europes noneuro zone, a just-signed free trade agreement (FTA) between China and Switzerland sent the world a strong signal against trade protectionism and will serve as a positive example for China-Europe cooperation, Premier Li Keqiang said Saturday. The FTA, the first of this kind inked between China and a country in continental Europe, is a milestone in the China-Switzerland relations, Li said during his meeting with Swiss Federal Councilor Johann Schneider-Ammann. Schneider-Ammann and Chinese Commerce Minister Gao Hucheng signed the trade pact Saturday in Beijing, after over two years of negotiations and legal processes. Li said advancing freedom and convenience in trade and investment could be "a good remedy" for the difficult recovery of the global economy. He said China supports a multi-lateral trade system and believes that the trade between countries and regions as well as multi-lateral trade are equally important. China is willing to work with all related parties to achieve progress in Doha round negotiations and help stabilize and revive world economy, he said. Schneider-Ammann, also head of the Swiss Federal Department of Economic Affairs, said the signing of the FTA is a historic moment. He said Switzerland will grasp opportunities arising from the pact to upgrade the cooperation of the two countries. China is Switzerland's largest trading partner in Asia, while Switzerland is China's eighth-largest trading partner in Europe, according to official Chinese data. Once the FTA goes into effect, as much as 99.7 percent of Chinese exports to Switzerland will be immediately exempted from tariffs, while 84.2 percent of Swiss exports to China will eventually receive zero tariff. The deal is also expected to facilitate industrial cooperation between both countries and set new rules in the areas of environment, labor, intellectual property and government procurement. Date: oct. 21.2013

Mircea Halaciuga, Esq. 004.072.458.1078 www.SIPG.ro