Wednesday, January 12, 2011

China Brings Renminbi Banking to the United States

China has announced that residents of New York and Los Angeles will be able to open deposit and business accounts in renminbi (China’s currency).  Individuals will be able to purchase CDs of six months or one-year duration, or make cash deposits of up to $4,000 a day and $20,000 a year at Bank of China branches in the U.S., which will be covered by FDIC guarantees.

Some critics say that this new policy is a trivial change, and fails to liberalize the exchange rate of the renminbi to permit greater appreciation to the satisfaction of the U.S. government.  But this perspective misses the point.

The amount of renminbi deposits that can accumulate over the course of the next year, if every resident of New York and Los Angeles makes the maximum deposit, is on the order of $200 billion, one year's worth of new foreign exchange reserves.  But that is exactly the point.  China will establish renminbi banking in the U.S. in a completely non-threatening manner.  Other banks and cities will push for similar privileges, which China will grant (although claiming it does so reluctantly).  As the renminbi slowly appreciates against the dollar, ordinary American households will become comfortable holding part of their cash and CDs in renminbi.  Business firms will remit money to and from China in renminbi.

In five years, Americans will routinely transact business in renminbi and use the currency for travel as more and more countries use renminbi.

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