B&R can help push yuan internationalization

By Liang Haiming Source:Global Times Published: 2017/5/17 23:23:39

Illustration: Peter C. Espina/GT

It has become common knowledge that the Belt and Road (B&R) initiative will help push forward the internationalization of the Chinese yuan. China has signed currency swap agreements with more than 30 countries and regions, among which 22 are along the B&R route. Of the 23 countries with whom China has launched direct trading of the yuan, eight are along the route. Also, the financial institutions of many B&R countries have participated in the yuan's Cross-Border Interbank Payment System launched by China.

With the continuous advancing of the B&R, China's gradual opening of stock and bond markets to foreign investors and the upcoming launch of the bond connect program between the Chinese mainland and Hong Kong, countries along the B&R route are expected to increase their usage of the yuan.

Of course, we must also be aware that there is still a long way to go to internationalize the yuan. Due to the depreciation of the yuan and China's capital outflows in recent years, global investors are generally not so interested in yuan-denominated bonds and stocks, and most central banks don't actually see the yuan as an option for their reserve currencies. As such, the yuan only accounts for 1.1 percent of the global foreign exchange reserves, far below the 64 percent proportion of the dollar and below that of other major currencies as well.

Another major challenge for the internationalization of the yuan is competition with other major currencies. The yuan's internationalization will challenge the dollar, the euro, the British pound, the Japanese yen and other major currencies in terms of global status and market share. In this sense, it is understandable for the yuan to face pressure from Western countries.

But this does not mean that it is impossible to internationalize the yuan. As the world's second-largest economy, China is playing an increasingly important role and has growing relevance to the global economy. In the long run, the yuan still has the potential to become a recognized reserve currency and an international exchange currency.

The large number of Chinese people living overseas could also help to enhance the influence and status of the yuan in the international market. Overseas Chinese, especially those in countries along the B&R route, have huge demand for the yuan as they generally trust it and find it easy to convert and relatively stable.

Also, in many countries along the B&R route, overseas Chinese people contribute to the local economy, but their political status is relatively low. From the security point of view, it may not be the best option if their assets are all denominated in local currencies. In this case, increasing the overseas assets allocation would offer them a more solid guarantee for their personal wealth.

As regards easy convertibility, it is not complicated if someone wants to change the yuan into other currencies at either official or private financial institutions in Hong Kong, the world's largest yuan offshore market, or in many countries along the B&R route, thus bringing great convenience for overseas Chinese in terms of currency exchange.

Regarding stability, the currencies of many B&R countries are somewhat volatile, and some have even undergone serious devaluations. In comparison, the yuan has only seen limited depreciation and has been relatively stable.

Since overseas Chinese have substantial demand for the yuan, authorities like the Overseas Chinese Affairs Office of the State Council, the People's Bank of China and the Hong Kong and Macao Affairs Office of the State Council should work together to come up with relevant measures to encourage overseas Chinese to increase their holdings of yuan assets, thus promoting the internationalization of the currency. Academic institutions like Jinan University and Huaqiao University that have close contact with overseas Chinese people may also consider conducting research into relevant topics so as to provide academic support for capitalizing on the potential offered by overseas Chinese.

With proper measures, the yuan's internationalization could be first achieved among the 300 million to 400 million overseas Chinese before being expanded to countries along the route. In this way, the yuan's proportion in global foreign exchange reserves could surge from the current 1.1 percent to 5 to 10 percent in a decade, challenging the status of other currencies like the euro, the pound or the yen.

The author is chief economist with China Silk Road iValley Research Institute, a Guangzhou-based think tank. bizopinion@globaltimes.com.cn


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