16 November 2019
The yuan still has no strength to challenge the three major currencies
The yuan still has no strength to challenge the three major currencies

The pitfall of yuan globalization

A series of good news has emerged this October to suggest an increasingly globalized renminbi.

On Oct. 8, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) said the yuan was the eighth most traded currency in the world in August, with a market share of 1.49 percent. From January 2012 to August, foreign exchange denominated in the yuan increased 113 percent and the Chinese currency overtook the Swedish krona, the Korean won and the Russian rouble.

Two days later, the European Central Bank and the People’s Bank of China signed a currency swap deal worth 350 billion yuan (US$57 billion), the largest China has forged with a foreign central bank outside Asia. This deal is a strong vote of confidence on the yuan by the European Union.

A day after the deal, Premier Li Keqiang announced that China would “actively” consider the establishment of a yuan clearing center in Thailand. If the plan pushes through, Thailand will follow Hong Kong, Macau, Taiwan, Malaysia, Singapore and Luxembourg to become an offshore renminbi trading hub. Cities that have shown interest in becoming a yuan trading center include Dubai, London, Frankfurt, Paris and Sydney.

There is no doubt that the yuan’s international influence is growing, to some extent, rapidly. It is also clear that Chinese policymakers are determined to internationalize the currency.

But we must remain cool-headed. Otherwise, we will blindly pursue an international currency status that does not match the real strength of the yuan and the Chinese economy.

First of all, the global share of the renminbi is nothing but small, as SWIFT figures have shown. Despite its improvement in the past years, the yuan has no strength to challenge the three major currencies, namely the United States dollar, the euro and the Japanese yen.

Second, most foreign countries do not really use the currency swap they have signed with China. So far, 23 countries and regions across the world have entered into swap deals amounting to 2.57 trillion yuan, but in the first half of this year, only 9.32 billion of it was used. Hong Kong and Singapore, the two trading centers, make the most use of the swap deals. This shows that most of the swap deals remain symbolic.

Third, as a trade settlement currency, the renminbi has not met expectations. It is used in more than 10 percent of the mainland’s trade deals. One reason to internationalize the yuan is to help Chinese traders avoid foreign exchange risks.

It is supposed that if a currency becomes a trade settlement unit, traders from the country issuing the currency could well avoid foreign exchange fluctuations, as reflected in the case of US traders. But surveys showed that in about one-third of the trades settled in renminbi, Chinese exporters agree to shoulder all foreign exchange losses. This happens mainly because the yuan is often used when Chinese import goods, but not used in exports. That means the yuan is a crippled trade settlement currency that fails to totally cushion Chinese traders from risks.

Last but not the least, the yuan’s global allure comes mostly from its appreciating trend. Many overseas traders and investors tend to hold the yuan as a speculative tool, not as an investment or trade medium.

As China’s capital account controls remain and as the yuan is not fully convertible, foreigners find few channels to invest their yuan portfolio. Overseas investors will reduce their yuan assets if the currency’s appreciating trend slows or reverses, and the yuan will quickly lose its ground.

Simply put, the yuan’s current international status is mainly supported by its value but not by its function as a real international currency.

In this sense, a pursuit of yuan’s globalization should not go beyond the currency’s current strength.

What is urgent is to improve China’s financial systems such as interest rate and foreign exchange reforms and support private companies investing overseas.

Only after Chinese investors and consumers spread across the world and use the renminbi freely in and out of China, can the currency become truly international.

Zhang Xinmo, a commentator based in Beijing, has been a journalist for more than 10 years in China and Hong Kong. He writes mostly on China’s economic issues.

– Contact the writer at [email protected]




The writer is an economic commentator. He writes mostly on business issues in Greater China.