Challenges, choices in yuan internationalization

Source:Global Times Published: 2018/8/12 22:53:39

Editor's Note:

Trade friction with the US poses a challenge for China's financial markets. The markets are concerned over the next steps in wide-ranging reforms amid the yuan's slide and a weak stock performance, among other woes.

Amid these issues, a host of influential people gathered at an event hosted by the China Finance 40 Forum, a leading Chinese think tank, over the weekend. The Global Times has extracted comments from the event held in Yichun, Northeast China's Heilongjiang Province that might shed some light on the path to a brighter economy.

Zhou Xiaochuan Photo: VCG

Zhou Xiaochuan, former governor of the People's Bank of China (PBC), the country's central bank

Four points require attention while pushing the yuan's internationalization. First, the push needs to be kept low-profile. We don't have the last word on the yuan's internationalization; the key lies in market participants' willingness to use the yuan. Therefore, the goals shouldn't be set too high. Internationalizing the yuan is a long-term process and too much publicity will instead trigger unnecessary speculation.

Second, choices must be made among reforms. Internationalizing the yuan requires efforts to push for the currency's free use and to advance the exchange-rate regime reform, but opinions differ on the advantages and disadvantages of each effort. Some efforts will have to take priority, because nothing will get done if every effort is pursued.

Third, China must persevere in its efforts to internationalize its currency. In most cases, only years of continued efforts can slowly produce results, and there mustn't be frequent changes or practices that regard some institutional arrangements as fine-tuning. The yuan's internationalization is up to the market's final choice and without stable policies, the market may lack confidence in the yuan. Additionally, in terms of diversified reserve portfolios and reserve currencies, policy instability will confuse the market.

Fourth, wobbling on institutional arrangements must be avoided. While everyone might agree in principle that policies must be stable, there could be changing situations because economic growth is sometimes robust and sometimes slow. There have been comments that international trade faces problems and there might be some destructive changes and aftershocks. We have to take countermeasures in the wake of the changes, but such measures need to consider all factors. If we flip-flop among different arrangements, there might be an adverse impact over the long term on the yuan's internationalization.


Yu Yongding Photo: VCG

Yu Yongding, a senior researcher with the Chinese Academy of Social Sciences and a former adviser to the PBC

Economic theory says that there should initially be a free float of the yuan before the capital account is liberalized, and by that point the yuan will be an international reserve currency. But that's not capital-account liberalization in its entirety and there must be efforts in this direction to eventually achieve yuan internationalization. We have some problems regarding the time sequence. I would mention one thing here specifically: the yuan's internationalization shouldn't be considered as something that adds pressure to freeing the capital account.

If we can't address some fundamental problems such as intellectual property rights protection, the capital account won't be completely liberalized and the yuan's genuine internationalization won't be entirely accomplished. 

It's now necessary to continue the push for yuan internationalization, but many new possibilities have emerged. For example, the Trump administration is wielding the baton of sanctions on Russia and Iran and this situation allows for us to move ahead with the yuan's internationalization.

Iran has abundant crude oil and China has substantial interests in Iran. With the US cutting Iran off from the Society for Worldwide Interbank Financial Telecommunication and the Clearing House Interbank Payments System, two linchpin networks facilitating cross-border payments, it is suggested that Iran should opt for yuan settlements, pressing ahead with the yuan's internationalization. We have to seize the opportunity.

China's capital exports have also grown to scale, creating favorable conditions for the yuan to internationalize. Furthermore, international investment banks have shown a strong willingness to diversify their assets and thus they want to buy China's financial assets.

A global yuan is a prerequisite for and one hallmark of China's genuine rise as a world power. If we respect the market and proceed with the drive according to market principles and prove wise in seizing the opportunities, the yuan's move toward the status of a global currency will surely make sustainable yet well-grounded progress.


Jiang Xiaojuan Photo: VCG

Jiang Xiaojuan, former vice secretary-general of the State Council, China's cabinet

As the internet digital economy develops, the services sector, previously known for its low efficiency and non-tradable status, appears to have changed. Over the past decade, trade in services as a percentage of total trade has been on an upward spiral.

As services globalize, China's services sector has displayed conspicuous advantages. First, a country as big as China underpins the development of new services, which initially rely on the domestic market to grow rapidly to scale.

The scale of the market is vitally important in the internet era. In addition, a big market can allow for services industries to have a specialized division of labor and improved efficiency. In the internet era, China has great potential to develop its services sector, which will become globally competitive.

Services trade in the age of globalization also has implications for the China-US relationship. When it comes to China-US trade, China has a surplus in merchandise trade with the US while recording a deficit in services trade. Still, China's merchandise trade surplus far outstrips its deficit in services trade.

Over the short term, China's services trade deficit with the US and the structural complementarity between the two countries in services trade will serve as a buffer against China-US trade conflicts. Over the long term, however, the two countries are heading for a rivalry in services trade.

The reasons include their income levels drawing near each other, a limited proportion of technology trade. Also, China's domestic market is seen propping up the services sector's rapid growth.

The country has prominent advantages in developing the services sector in the internet space, and it continues to attract foreign capital and improve the quality of services products.

Cai E'sheng Photo: VCG

Cai E'sheng, former vice chairman of the China Banking Regulatory Commission

There was an opportunity for the yuan's drive toward a global currency amid a weak US dollar, but the situation has changed and our confidence has accordingly ebbed. There needs to be a re-think of the objective understanding of the situation. China's financial opening is primarily driven by the economy's internal dynamics.

Amid the push for deleveraging, the country's private-sector economy has nonetheless been hit by some unexpected challenges, which have given rise to concerns that the State economy is gaining at the cost of its private counterpart.

The government has actually clarified its support for both State-owned enterprises and the private sector, and the changing situation is worthy of consideration.

Other than that, I think it is biased to contrast opening with regulatory tightening. It's not the case that financial opening is supposed to come with regulatory easing.

The US, for its part, doesn't base its market easing decisions on the openness of its market. Since the 2008 financial crisis, many scholars have attributed the crisis to primarily supervision. But I think there were deeper internal factors behind the crisis.

Over the course of market opening, taking the US as an example, the country has never loosened the reins on its banking sector regarding the issue of breaking market rules.

If the rules are broken, there will be harsh penalties, however open the market is. The question arises as to whether China's regulatory mindset must make tweaks along with policy changes and whether we have to loosen our grip when it comes to reform and opening-up.

This kind of mindset, I believe, has resulted in some changes that shouldn't have been made to the rules, environment and order of the market. Problem-solving by using laws and rules needs to be upheld and regulators shouldn't resort to expediency.


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