Yuan set to be fully convertible in five years

Source:Global Times Published: 2017/11/2 22:28:39

Illustration: Peter C. Espina/GT

China has entered a new era in building socialism with Chinese characteristics. In the economic arena, the new era means China will be more open and the economy will be more vibrant. The next five years will also see China further open up its financial sector and the changes in the financial system will be unprecedented.

First, the role of finance will change fundamentally. Financial markets, previously focused on fundraising, will increasingly sway toward capital raising as well as wealth management. This means the capital markets will play a much bigger role.

Second, China's yuan reform will be finished over the next five years. By then, the Chinese currency is expected to be fully convertible, laying the groundwork for the yuan's growing role as an international reserve currency.

Reforms of the international currency regime are also considered a significant task in the next five years. As part of the reformist drive, the yuan will apparently have growing clout and will have greater weight in the international currency regime. This signals not merely a heftier weighting for the Chinese currency in the IMF's Special Drawing Rights (SDR) currency basket, but also the yuan will be more widely used as a global reserve currency as well as having increasing importance in trade settlement.

We have a financial dream that the yuan will be truly internationalized. It is hoped that one day we will be able to take yuan to every corner of the major continents and convert it into whatever currency we might need. This, however, requires careful observation of any problems that might occur during the course of the yuan's internationalization.

It's unlikely that the yuan's internationalization will happen without a hitch. There will be constraints, both internally and externally. The major internal factor that may affect the yuan's internationalization is the issue of ensuring the currency's long-term credibility, which is essentially about reassuring the markets that the yuan is reliable, stable and an asset that will hold its value. This will surely entail efforts to improve the country's legal environment. In order to protect the yuan's long-term credibility, offering runaway credit as a means of steadying short-term economic growth needs to be avoided. In addition, a balance needs to be struck between actions to stabilize the economy in the short term and efforts to maintain the yuan's creditworthiness over the long term.

All this points to a path ahead for the yuan's internationalization that needs to be well chosen and balanced.

China's M2 money supply is massive, and is now nearing 170 trillion yuan ($25.72 trillion) while the country's GDP is expected to reach about 78 trillion yuan by the end of 2017. The ratio is the highest among the world's major economies. The US' GDP currently stands at over $17 trillion while its M2 money supply is $14 trillion. This shows that it's important to reduce the excessive amount of M2 in China, and reducing the pressure on asset prices and the exchange rate from yuan oversupply are also serious issues.

Meanwhile, the yuan's internationalization is also subject to extensive external pressure, primarily coming from the US dollar. The yuan will become a significant global reserve currency in the future, but it's not supposed to replace the dollar.

Third, the country is poised to finish internationalizing its financial system. China's financial markets will be part of a new global financial hub, one of the essential characteristics of a world power such as China. Each of the countries at the top of the global financial power system are home to globally recognized financial centers. As China inches closer to the center of the world stage, its financial system and financial markets will surely become the new focus across the globe. Shanghai and Shenzhen are expected to be the country's new financial hubs that will serve as the epicenter of trade and allocation of yuan-denominated assets. They are also set to play a vital role in global asset allocation that will include dollar assets.

These are our strategic goals for the future. The road ahead is filled with brightness, but the task will not be easy.

The article was compiled based on a speech by Wu Xiaoqiu, vice president of Renmin University of China, on October 28. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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