Why the renminbi’s challenge to the dollar has faded

Trade conflicts have made it hard for China to let its currency trade more flexibly

Hudson Lockett in Hong Kong and Eva Szalay in London

A decade ago, China launched a high-profile challenge to the dominance of the US dollar, projecting a greater role for the renminbi in the global financial system. But the would-be challenger is struggling.

The dollar is still used on one side of 88 per cent of all foreign exchange trades, according to the latest triennial survey by the Bank for International Settlements, while the renminbi’s share is just 4 per cent, with a rise in turnover “only slightly faster” than the overall market. The currency amounts for about 2 per cent of total foreign exchange reserves, according to the IMF.

In Hong Kong, renminbi deposits tracked by the Hong Kong Monetary Authority have dropped more than a third from their 2014 peak. And the value of offshore renminbi bonds was $53bn at the end of the first quarter of this year, down more than half from the 2015 peak, according to the Asia Securities Industry & Financial Markets Association.

Market participants say internationalising the renminbi would require Beijing to let the currency trade more flexibly and to open up the country’s capital account. “Right now it isn’t safe to do either,” said Brad Setser, an economist at the Council on Foreign Relations, a US think-tank.

Beijing still yearns for a financing system independent of the dollar, in part to reduce Washington’s reach into China’s business sector. A US appeals court ruling earlier this year offered a reminder of how far that reach extends: the decision raised the possibility that the Shanghai Pudong Development Bank, a lender with $900bn in assets, could be cut off from dollar-denominated funding for failing to provide records on a Hong Kong-based company allegedly used to evade US sanctions.

But progress is slow. At a conference in September, Chris Hall, the London-based head of trading at state lender China Construction Bank, said US-China trade tensions had put a dampener on the growth of offshore renminbi markets. There is a “tendency to take a step back and wait and see”, he said.

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During the depths of the financial crisis, China had grand plans. Zhou Xiaochuan, then governor of the People’s Bank of China, called for sweeping reforms to the dollar-dominated international reserve system and a greater role for the renminbi. “The crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system,” he warned.

Global use of the renminbi would reduce exchange rate risks for Chinese companies, and minimise exposure to sharp drops in dollar liquidity — one driver of the fall in Chinese exports during the financial crisis.

“There was both an objective to use renminbi internationalisation as a wedge to drive finance sector reform, but there was also a very strong and widely held view that having a more fully independent currency was really important to secure China’s economic sovereignty,” said Arthur Kroeber, managing director of research company Gavekal Dragonomics.

Mr Zhou’s initiative came at an awkward time. Despite having a large economy, China had neither deep financial markets facilitated by an open capital account nor widespread confidence in its currency — elements deemed “fundamental determinants” of international currency status by Harvard economist Jeffrey Frankel.

Yet the central bank pushed on, creating an offshore market for renminbi debt centred in Hong Kong. By 2014 annual offshore issuance had climbed to Rmb112bn ($16bn), according to Dealogic. The offshore exchange rate is independent from the controls used by the central bank on the onshore rate, which limits moves against the dollar to 2 per cent in either direction of a daily fix.

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But in August of 2015, the central bank set the daily fix sharply weaker, inducing a shock devaluation in the normally stable onshore rate. Global markets convulsed and the offshore rate pushed below its onshore counterpart, spurring massive capital outflows on fears of a further sharp depreciation. Ultimately, Beijing tightened capital controls to stem renminbi outflows, which cut off liquidity to the offshore market.

Mr Kroeber contrasted this move to the US decision in the 1960s not to throttle the nascent eurodollar market when an offshore pool of dollar liquidity began ballooning in Europe.

China’s decision stabilised the renminbi, he said, but left it bereft of credibility as an international financial currency. “Who’s going to issue or buy bonds in a market where liquidity can be turned off at the drop of a hat?” he asked.

This year, offshore renminbi bond issuance totalled just Rmb16bn at the end of September compared with onshore issuance of Rmb4.5tn, Dealogic data show.

Logan Wright, director of China research at Rhodium Group, said there was still a case for the renminbi’s rise in global reserves but, barring drastic changes to trade flows, not to the level of the dollar.

“It depends upon countries and millions of individual participants being willing to hold the currency and transact in it,” he said.

The Rental Economy Is at Risk in a Downturn

Businesses that rely on renting homes, leasing cars, and streaming music or movies are largely untested in a recession

By Justin Lahart

llustration: Sam Island 

Americans don’t own stuff like they used to.

Fewer of them own the homes they live in than in the past, opting to rent instead. A growing share have opted to lease the car they drive—if they drive at all—rather than hold the car’s title. And it seems only aficionados own DVDs or music recordings instead of a streaming subscription.

The shift away from ownership to what KKR’sPaula Campbell Robertshas called the asset-light consumer represents a reshaping of the economy, borne of a confluence of factors, including the scars left by the 2008 financial crisis and the advent of new technologies. It is giving households increased flexibility in how they finance their lives, lowering the debt burden that often comes with ownership.

Investors are loving the rental economy too, paying up for businesses with steady cash flows. But the asset-light consumer’s behavior remains largely untested in a downturn—a rising risk—and could hold nasty surprises.

The homeownership rate—the share of U.S. households that own the home they live in—peaked at about 69% in 2004 and fell during the financial crisis. It never recovered, now standing at about 64%, or about six million fewer owned homes than at the peak.

That shift to rentals represents big income streams. Investors such as Blackstone Group bought up heavily discounted homes following the financial crisis, turning single-family rentals into a big business. Just two companies, Invitation Homes, which Blackstone helped bankroll, and rival American Homes 4 Rent own 133,000 homes combined.

One reason more people are renting may be that, after the financial crisis, homes aren’t seen as such a safe investment. In an economic downturn it can be easier for renters to lower their housing costs by moving into a lower-rent home or to move for job opportunities elsewhere. Homeowners, stuck with mortgage payments, have it harder.

That flexibility comes at the cost of not building up home equity, which can help create wealth and provide a financial cushion in an emergency. But it also means the new crop of landlords faces their own risks. Following recessions, rents can stagnate or even fall, while the number of vacant rental units often rises. Investors in rental properties may not have accounted for lean times. 

One might point them to the auto-leasing market for clues about what can go wrong, but that industry also seems to have forgotten the lessons of the last recession. Leasing deals have doubled to 32% of new vehicle purchases over the past 15 years, according to Edmunds.com.

Leases come with lower upfront costs and typically require lower monthly payments than car loans. They benefit car companies too, offering a steady income stream and a stable supply of used cars.

As with homeownership, flexibility comes at a cost. The car owner has an asset after paying off loans while the lessee doesn’t. But the average lease length is about half the average length of a car loan. In a downturn, lessees can more easily lower their car-payment costs and avoid the losses associated with selling a used car into a down market. The company financing the lease could be left on the hook. In 2008 a glut of cars came off lease and had to be sold at deep discounts, causing sharp losses.

Lately younger people in particular have eschewed personal vehicles altogether. That is a boon to companies such as Uber and Lyft. How will the nascent ride-hailing industry fare in a recession, though? Nobody knows.

Entertainment is increasingly rented too.

Last year, consumer spending on services that stream and rent video and audio came to $28.2 billion, according to the Commerce Department, which compares with $9.8 billion a decade earlier. Over that same period, spending on recording media, like CDs and DVDs, slipped to $16.2 billion from $25.8 billion. As with other rent-like services, streaming provides the steady income that investors love— Netflix briefly surpassed the value of Walt Disney this year—but is also something that consumers can cut back on.

Will they? Netflix’s streaming efforts didn’t even start until 2007, right before the last recession. Now it is a much bigger company financed by billions in junk bonds.

It isn’t alone.

JPMorgan Chasecalculates that the corporate-debt-to-income rate for the domestic nonfinancial corporate sector now exceeds the level before the last recession. Household debt remains a concern, but debt-to-income levels are down sharply from where they were before the rental revolution.

If times get tough, how many companies will find that the rental checks they were counting on aren’t in the mail?

Still Think There’s No Inflation? Check Out All The Affluent Renters

by John Rubino

Generally speaking, if you can afford to buy a decent house you do it. Owning is viewed by most people to be both simpler (no worries about your landlord selling a rental out from under you) and a better financial deal. And of course there’s the status of home ownership.

When you rent, people wonder why you can’t afford to buy. When you own, they view you as a higher class of neighbor.

Yet a growing number of affluent Americans are now renting.

From today’s Wall Street Journal:

So You Make $100,000? It Still Might Not Be Enough to Buy a Home 
DENVER—For Janessa White, the American dream of a red brick house on a tree-lined street blocks from a good elementary school remains obtainable. She just has to rent it. 
Ms. White and her boyfriend moved with her 7-year-old son from Missouri to Denver last year. In Missouri, Ms. White owned her home, which she bought for a little over $100,000.  
To buy a house like the one she rents in Stapleton, an affluent section of the Colorado capital, would cost about four times as much. Even though her household’s income is in the low six-figures, homeownership is daunting in Denver. 
“It’s hard not to want to buy,” she said. “Saving for a huge down payment seems almost impossible.” 
Ms. White’s household is part of a growing camp: high-earning Americans who are renting instead of buying homes. In 2019, about 19% of U.S. households with six-figure incomes rented their homes, up from about 12% in 2006, according to a Wall Street Journal analysis of Census Bureau data that adjusted the incomes for inflation. The increase equates to about 3.4 million new renters who would have likely been homeowners a generation ago. 
“I can’t think of anyone we’ve rented to recently who didn’t make $100,000,” said Bruce McNeilage, who owns 148 rental homes around the Southeast and is building 118 more. 
It isn’t unusual for high-earners to rent in pricey coastal cities like New York and San Francisco, where sky-high real-estate prices have long limited homeownership.  
Yet these markets account for less than 20% of the new six-figure renters, according to the Journal’s analysis.
affluent renters
In each of those cities as well as in Seattle, Cincinnati and Ann Arbor, Mich., the number of six-figure renters doubled or better between 2006 and 2017, making them the fastest-growing segment of renters in these markets, according to the Journal’s analysis. 

During that period, which began just before the housing market imploded in 2007, the number of renter households in the U.S. grew 25% while the number of homeowners was nearly flat, according to the U.S. Census Bureau. Since 2017 home buyers have started returning to the market, but not nearly enough of them to offset the decade of new renters. 
A $100,000 income is still comfortably in excess of the median U.S. household income, which was $63,179 in 2018, according to the Census Bureau. But many Americans these days are mired in debt. They have car payments, credit-card debt, health-care bills and college loans. Student debt is particularly vexing for the younger Americans who are starting families. 
There is a connection between student loans and the housing bust, which isn’t lost on young home buyers. Many students took out loans because the housing crisis wiped out the equity in their parents’ homes that would have helped pay for college. Since then the amount of student debt outstanding has tripled, to more than $1.6 trillion.  
A couple of years ago Fannie Mae, the government-sponsored mortgage giant, made it easier for borrowers with higher debt levels to qualify for a mortgage, though recently Fannie tightened its lending standards. 
Those who do want to buy a home face the additional hurdle of high prices that have surged beyond the reach of even relatively high earners in cities with strong jobs growth.  
Prices in 75 of the country’s 100 largest metro areas have surpassed their precrash highs, not adjusting for inflation, according to mortgage data and analysis firm HSH. Many of those cities, such as Salt Lake City and Raleigh, N.C., also have some of the fastest growth in high-paying jobs. The sharpest recovery, according to HSH, has been in Denver, where home prices have doubled since 2012 amid an influx of California tech workers and New York finance firms. Prices are nearly twice their precrash high. 
It takes an annual household income of about $90,000 to afford Denver’s median-priced house, which costs around $471,000, according to HSH. But that is assuming buyers have 20%, or about $94,000, for a down payment. 
“The lack of savings for a down payment in this country is grossly underestimated,” said John Pawlowski, a housing analyst at Green Street Advisors, who estimates that the typical renter’s net worth is about $5,500. “Consumer balance sheets are not good.”

To summarize, US policy of running massive government deficits while encouraging (via unnaturally low interest rates) everyone else to borrow like crazy has sent home prices soaring beyond the reach of many seemingly affluent Americans.

Yet this obvious inflation doesn’t show up in official statistics because houses (along with stocks, bonds, and fine art) are “assets” and so don’t belong in the “cost of living.”

What comes next will be nice bit of poetic justice.

The current financial asset boom is long in the tooth and will therefore end pretty soon, causing house prices to tank and many of today’s home buyers to regret their decision.

Renters, on the other hand, will be glad they dodged that financial bullet.

John Lithgow: Trump Is a Bad President. He’s an Even Worse Entertainer.

The performer in chief is forcing us to live in a B-movie horror.

 Credit John Lithgow
Readers of this page have every reason to be suspicious of the political musings of an actor. I’m suspicious of them myself. But consider this: Our politics and our press are completely dominated by an entertainer president. In recent weeks we’ve even read about our ex-reality-show host president discussing foreign policy over the phone with the ex-TV comedian president of Ukraine.
Entertainment and politics have become bizarrely intertwined. Perhaps it’s time for a working entertainer to weigh in.
I call Donald Trump an “entertainer president” advisedly since he has proved himself to be such an inept public servant. Over the years, he has thrust himself into the public eye with the flamboyant histrionics of a latter-day P.T. Barnum. Part of this is the amoral tradecraft of a New York real estate developer, but a lot of it springs from the appetites of a voracious attention-getter.
Think of Mr. Trump preening at his beauty contests, body-slamming Vince McMahon at W.W.F. events or holding rallies that resemble the arena gigs of an insult comic. These are the antics of a showman, not a statesman.

Mind you, a flair for entertainment is not a bad thing in a leader. We can quote verbatim from performances on the world stage by Winston Churchill, Franklin Roosevelt and John Kennedy.
Eloquence and wit like theirs have helped rally nations, defeat poverty and win wars. It took Ronald Reagan, an actual actor president, to put the perfect timing and emphasis on the simple sentence, “Mr. Gorbachev, tear down this wall.”
But Mr. Trump is something else again. Where Reagan was the product of the tight quality control of Hollywood’s old studio system, Mr. Trump emerged from the curated chaos of reality TV. He even impersonated his own press agent over the telephone.
As bad a president as Mr. Trump has been, he’s an even worse entertainer. He reads scripted lines like a panic-stricken schoolboy at a middle school assembly. He mangles every attempt at irony, self-mockery or, God forbid, an actual joke. He cravenly fills the hall for every rally with a hopped-up claque drawn from his hard-core base. And he can be grotesquely inappropriate at his public appearances, as when he babbled inanely about crowd size and margins of victory on recent condolence visits to Ohio and Texas after mass shootings in those states.
Pause for a moment and recall No-Drama Barack Obama. Remember when we would whine about how aloof and deliberative he was? Maybe there was some truth to that complaint but, wow, did that man know how to choose his moments.
Think about the time when, during his eulogy for the pastor Clementa Pinckney, slain in his Charleston, S.C., church in 2015, Mr. Obama began to softly sing “Amazing Grace.” Can you imagine a greater contrast or a sterner rebuke to the broad grin and upturned thumb of our current president after the Walmart shooting this past summer in El Paso?

It is dispiriting to watch the wretched excesses of Mr. ­­­Trump’s slapstick presidency and the rabid audience he commands. But there may be an upside to his crude performance art. His relentless lies, impulsive acts and gassy pronouncements have emboldened American journalists and quickened their senses.
And just as heartening, the Trump phenomenon has sharpened the wits of a whole new breed of entertainers. These are the daring TV comics who gleefully turn Mr. Trump’s outrages against him every night of the week: Stephen Colbert, John Oliver, Seth Meyers and others.
As entertainers, they are everything Mr. Trump is not. They’re smart, informed, disciplined, self-aware and genuinely funny. Not a single item in the day’s news goes unexamined by these warrior satirists, and unlike the late-night comfort food of days past, their comedy is heightened by the bright fire of their anger.
Entertainment, it turns out, ain’t beanbag.
Everyone loves a good villain onscreen and onstage. Shakespeare himself must have especially relished writing lines for Macbeth, Iago and Richard III. But coldhearted monsters in movies and plays are the stuff of fantasy. When we’re sitting in the audience, some part of us is reassured knowing that we are watching fiction.
Reality is a lot less entertaining and a lot more frightening. There has to be a way to rein in real-life villainy in public life. Our government of checks and balances has finally taken on that challenge.
With House committees examining Mr. Trump’s recent invitations to foreign governments to meddle in our elections, impeachment is not only possible but probable.
But it will be an uphill struggle. Impeachment would not necessarily close down this long-running freak show. Other forces need to be brought to bear.
Soon, with any luck, journalism and entertainment will act in concert with an energized voting public to bring an end to the Trump nightmare. If not, we’ll have to wait a little longer for quality drama and accommodate ourselves to a continuing diet of B-movie horror.
John Lithgow, an actor and illustrator, is the author of the forthcoming book “Dumpty: The Age of Trump in Verse.”