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China Beats Growth Expectations and Seeks Partnership with the UK

Chinese GDP was higher than anticipated at 6.9 percent in a week that also saw President Xi Jinping visit the UK

China had a productive week that started with the release of better-than-expected gross domestic product (GDP) data and a four-day visit to the UK by Chinese President Xi Jinping. China’s GDP numbers beat expectations with a 6.9 percent print, although government officials warned markets that economic growth will remain below 7.0 percent for some time due to current macro-economic conditions.

The standout sector in the Chinese economy, according to the GDP report, was services, which grew 8.4 percent, offsetting slower growth components. The rise of the services sector is a good sign as it minimizes the dependency on the manufacturing and trade sectors. The economic data is showing a shift in China’s growth model, one led by domestic consumers. Global conditions continue to dictate the ways in which China does business, both at home and abroad.

Best Friends: China and the UK

China has taken proactive measures to improve economic conditions by expanding its investment in other markets. That was the primary objective of President Xi’s four-day trade visit to the United Kingdom, where China pledged £30 billion to various projects ranging from energy and finance deals to seeking to reduce the cost of visiting visas. China has set an ambitious goal of becoming the UK’s largest trading partner.

The UK and China have come a long way since diplomatic relations between the two nations were strained after British Prime Minister David Cameron hosted the Dalai Lama in 2012. The UK has since then courted several Chinese investments and the fruits of that partnership are set to bring the first new nuclear plant to the UK by 2025. The more than £30 billion investment in all projects will create 3,900 jobs in the British Isles.

London is the global hub of foreign exchange. President Xi’s visit was the perfect occasion to announce an extension to the historic swap deal that China has in place with the Bank of England. The bilateral swap deal was renewed and will increase by 150 billion yuan. It was also announced that the City would be the first offshore market to issue yuan-denominated debt.

The Meteoric Rise of the Yuan

The yuan has gone through a transformative period on the path to achieve global currency reserve status. The use of the yuan for trade and investments abroad has made the renminbi widely anticipated to be the next global reserve currency. HSBC forecasts that the yuan will reach full convertibility as early as 2017/18. The International Monetary Fund (IMF) has praised the efforts from Chinese authorities to adopt a market based pricing mechanism and it would not be a surprise if in its November meeting the IMF announces the yuan as part of its special drawing rights (SDR) basket – currently made up of dollars, yen, pounds and euros.

China argues that its status as the world’s second-largest economy and the rapid rise of the yuan as a top traded currency, make it deserving of inclusion into the IMF’s exclusive currency reserve club. The IMF’s SDR was designed to diversify and supplement member currency reserves. The rise of the yuan and the economic reach of China, not only in Asia, but in the global economy justify it becoming a part of the IMF’s currency reserve basket as it would more proportionally reflect current economic conditions.

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