18 August 2019
China has a lot more work to do on the renminbi's internationalization path. Photo: Bloomberg
China has a lot more work to do on the renminbi's internationalization path. Photo: Bloomberg

Domestic reforms needed to promote yuan overseas

One of the significant changes in the government work report that Premier Li Keqiang delivered to the National People’s Congress on March 5 was the lack of mention of “promoting the use of yuan globally”, unlike the wording in the previous report given by Li’s predecessor Wen Jiabao.

In fact, it was the first time since 2010 that the topic of the yuan’s globalization was not touched upon in the annual government report. After the 2008-09 global financial crisis, China’s policymakers decided to put the renminbi’s globalization on top of their financial agenda, as they believed the dominance of the US dollar was the root cause of the crisis and that an internationalized yuan could help China reduce its risks from similar troubles in future.

But it is premature to say that the absence of yuan globalization reference in the latest government report marks a turnabout in the policy.

Instead, the absence means the top leadership has realized that there are some hurdles that impede the Chinese currency from expanding further in the world market, and that they should clear those obstacles.

There is no question that the yuan has gained popularity among global investors as a medium of three major kinds of transactions or functions — payments, trade and reserves.

According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the yuan surpassed the Swiss franc to become the seventh most-used world payments currency in January.

The achievement came after the Chinese unit vaulted ahead of the euro and Japanese yen to become the second most widely used currency in international-trade finance in October. Last year, cross-border trade settled in renminbi hit 4.63 trillion yuan, a jump of 57 percent year-on-year.

Another progress also came earlier this year, when the central bank of Nigeria announced that it intends to increase the yuan holdings in its foreign exchange reserves from 2 percent to 7 percent, a sign of the currency’s growing popularity as a global foreign-exchange reserve unit.

Despite these achievements, we must bear in mind that the Chinese unit’s popularity builds mostly on policy pushes and a wide rate difference that allows holders of the currency to make easy gains. The yuan has not gained the same popularity as the US dollar, which continues to win hearts of global investors, traders and governments even though it is depreciating and offers little room to speculate on its an ultra-low interest rate.

This is because what supports the greenback’s global popularity is the depth and liquidity of its domestic financial market, and the currency’s full convertibility and open market, rather than high interest rate or its potential to appreciate. Simply put, the US dollar beats the yuan with its convenience of use and sound financial system.

As the renminbi goes international, China’s policy curbs on the currency and its rates represent the largest obstacle for the unit to expand further on the international turf.

This can be seen by the fact that overseas investors and residents tend to hold yuan through receiving yuan from their Chinese buyers and allowing Chinese companies to invest in their markets using yuan. But they are reluctant to use yuan to buy Chinese goods or invest in China. This has resulted in a situation where in the renminbi’s globalization is basically a one-way street.

Curbs did not affect the yuan’s globalization in the past mostly because the currency kept appreciating. But as the Chinese unit’s appreciation is expected to slow sharply this year, if not depreciate, overseas investors’ desire to hold the yuan will be dampened, and the financial curbs the Chinese authorities place on the yuan will further weaken their desire.

Fortunately, policymakers have realized that. As seen in Premier Li’s report, he deliberately did not mention the need to promote the global use of the yuan, but stressed the need for financial reforms.
Li listed interest-rate liberalization, yuan trading band widening, and capital account opening as top priorities.

With interest rates fully liberalized, rate difference will be narrowed so that yuan holders will not always increase their holdings. Widening the yuan’s trading band will allow market participants to have a bigger say in setting the foreign exchange rates, increasing their will to trade in the currency. Capital account opening will allow investors to use yuan more easily and efficiently in and outside China. This will help promote the two-way flow of the yuan, increase the liquidity of the yuan market and boost the convenience of using the currency.

In that sense, the logic of Li is clear: a yuan-globalization that relies on the appeal of high rates and appreciation prospects is not sustainable. Rather, it’s time to increase the unit’s attractiveness by removing the controls and making it more convenient to use.

– Contact the writer at [email protected]



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

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