Could the Philippine Peso Be Part of the Yuan Basket?

Could the Philippine Peso Be Part of the Yuan Basket?

China unexpectedly revealed a parcel of its currency configuration last week to announce that the US dollar, the Euro€, Japanese Yen¥ and the South Korean won taking up the largest share of the modified basket since it reformed its currency construct last July 21^st from entirely a US-dollar peg.

It also disclosed that other countries with significant trade relationship with China were also incorporated to its ‘managed float regime’ such as Singapore, UK, Malaysia, Russia, Australia, Canada and Thailand and hinted that currencies of more countries could be included provided that such countries, to quote People’s Bank of China Governor Zhou Xiaochuan speech, ``has a prominent exposure in terms of foreign trade, external debt (interest repayment) and foreign direct investment (dividend).” The revered Governor Xiaochuan explicitly added, ``Generally speaking, annual bilateral trade volume in excess of US$10 billion is not negligible in weight assignment, whereas that exceeding US$5 billion should also be considered as a significant factor in currency weight deliberation.”

It struck me to note that the Philippine bilateral trade with China has reached the level of `` not negligible in weight assignment” to quote the China’s People Daily Online, ``According to Chinese statistics, the trade volume between China and the Philippines soared to 9.4 billion US dollars in 2003, up 78.7 percent year-on-year. The 10 billion-dollar target for 2005 is likely to be exceeded as trade volume is expected to hit 13 billion dollars by the end of 2004, and the leaders of the two countries have set a target of 20 billion US dollars for the next five years during Philippine President Gloria Macapagal-Arroyo's state visit to China early September.”

According to the Philippine Embassy in Beijing whose chart above I included, ``In 2004, bilateral trade volume reached US$13.33 billion, representing a growth rate of 41.8 percent over the figure of US$9.4 billion in 2003. In the past five years, bilateral trade volume grew at a healthy annual average of 43.78 per cent, with the Philippines gradually selling more to China than it buys from China.”

It appears that China’s thrust is to veer away from exclusively utilizing the US dollar, which it considers as “unstable”, as a medium of exchange for its trading transactions with other countries as can be gleaned from the statement of the Governor, ``When you look at currencies used in trade settlement, although some countries and regions prefer US dollar as the currency for trade settlement with China, this situation is changing gradually and trade settlement in local currencies are increasingly the choice of trading partners…it can better reflect the competitiveness of RMB against major currencies, better absorb the impact generated by an unstable US dollar.” (emphasis mine) The statement could also imply that China is promoting its currency as an alternative to the US dollar!

Going back to the Philippine Peso, as per the defined parameter of the PBoC’s governor, the volume of trade which is in the excess of the $10 billion threshold level qualifies the Philippines as a peripheral currency to China’s basket, and most importantly, with conspicuous joint efforts to expand bilateral trading relationship to about US$20 billion to US$30 billion in the next 5 years! To quote, the Joint Statement of the Philippines and China following the state visit of Chinese President Hu Jintao (April 28, 2005) ``The two sides should give full play to the existing economic cooperation and trade mechanisms, tap into their economic complementarity and potential for cooperation, broaden and diversify trade structure, further expand trade and investment and make efforts to raise bilateral trade to over USD 30 billion within the next 5 years.”

This means that China would be a prominent buyer of the Philippine Peso, despite the ongoing domestic political mess!!! An expanding trade relationship with China should translate to even more buying of China into the Peso to account for weighting adjustments for its currency basket!

Remember, what is SMALL for China is essentially BIG for the Philippines. Based on Asian Development data in 2003 China’s GDP based on current prices is US$ 1.443196 trillion while the Philippines is $78.25 billion which is equivalent to only a meager 5% of China’s. In addition, Money supply represented by M2 for China is at US$2,731.83 billion in 2003 compared to the Philippines’ US$30,906 million or about only 1.1% of China’s. Even if the Peso represents a negligible share in its currency universe, the Peso volume required to fill its share would be immense on Philippine standards.

If I am right about the Peso’s inclusion to the China’s basket, then fundamentally China sets the floor price of the Peso! You can just imagine China’s growing economic clout or influence to the Philippines which eventually should gradate to the political sphere too.

Caveat for the Peso bears!