Yuan goes global

Source:Global Times Published: 2014-7-14 21:03:01

Experts weigh in on benefits, challenges of yuan internationalization


Editor's Note:

Inking offshore yuan clearing agreements and setting up overseas yuan clearing centers seem to be at the top of the agenda of recent overseas trips by top Chinese leaders. Meanwhile, the latest salvos in a race for yuan trading centers among major overseas financial hubs mirror the fast-growing popularity of the Chinese currency. Is this a good time for China to make bold strides in internationalizing its currency? What would be the benefits and risks? The Global Times interviewed scholars and economists to unveil the answer.

Lu Zhengwei

Chief economist at Industrial Bank

Lu Zhengwei



The major driver for China's internationalizing its currency is to get the yuan into the Special Drawing Right (SDR), a basket of currencies composed of the US dollar, euro, yen and sterling, a form of reserve asset used by the IMF and member governments.

According to the IMF's criteria, a SDR currency should be widely used for international transactions and in foreign exchange reserves before joining the basket.

Though use of SDR-denominated assets remains low globally and membership in the basket has little practical effect, including the yuan in the basket would symbolize recognition of a bigger international role for the Chinese currency.

The valuation of the SDR basket is reviewed and adjusted every five years, with the nearest review taking place in 2015. 

The IMF did not include the yuan in its SDR basket currencies in the 2010 review as it was unable to meet the IMF's criteria, despite market demand for adding it to balance the US dollar.

Some may say China's recent efforts to internationalize its currency is to challenge the dominance of the US dollar, but the status of the yuan is far from posing a challenge, given that even the euro is not strong enough to match the prevalence of the dollar.

An artificially boosted yuan in the international market does no good to China's economy. Under the current circumstances where the manufacturing sector is not very profitable, an internationalized yuan will lead to its appreciation as demand for the currency increases, further resulting in currency arbitrage, weigh on exports, and eventually drag down the economy.

Whether a nation's currency can be an international one depends on its economic strength, not the result of artificial effort.

Li Youhuan

Senior economist at the Guangdong Academy of Social Sciences

Li Youhuan





A nation's economic strength is symbolized by the international influence of its currency. Accelerating the internationalization of the yuan is an important way to strengthen the global influence and competitiveness of China, and to challenge the monopoly status of the US dollar in the international financial system.

The largest obstacle to accelerating yuan internationalization is resistance from China's largest competitor, the US, as a rising yuan threatens its dollar dominance, as well as resistance from other major economies whose currencies are already major international currencies.

Free currency exchange and the establishment of clearing centers are important steps in pushing for internationalization of the Chinese currency. The enthusiasm of the major European financial hubs toward yuan trading shows that they are well aware that global use of the yuan is a future trend, helping to boost the finance and economy in their nations.

We have seen financial hubs including London, Frankfurt, Paris and Luxembourg vie to set up offshore yuan clearing centers.

The yuan's global popularity is related to whether it is convertible under China's capital account. Existing control and partial inconvertibility in the capital account restricts the free movement of currency.

Many Chinese financial institutions are not well prepared for the settlement of the yuan and foreign currencies and free convertibility of the yuan.

Under these circumstances, existing current controls on the capital account serve as a fire wall to cut off the instant transmission of financial risks in the international market.

China is expected to gradually relax control when the time is right.

Liu Ligang

Chief China economist at ANZ Banking Group

Liu Ligang



Successful yuan internationalization depends on global acceptance, the financial infrastructure including a sound clearing system, sophisticated domestic financial institutions and a fully convertible yuan under China's capital account.

The progress of internationalization is subject to domestic financial reform, market opening-up and relaxation of capital control. It would be hard to promote the global use of the yuan without a fully open capital account.

The criteria for successful yuan internationalization is that the yuan takes at least half of the trade settlement value, yuan-denominated assets can flow out of China freely, and a totally market-driven exchange rate regime is set up.

Currently the yuan's share in trade settlement currencies is estimated to be less than 20 percent globally. This is expected to rise to more than 30 percent by 2025.

If trade payments are made in yuan, it will greatly reduce the foreign exchange risks for Chinese importers and exporters, compared to when they use the US dollar. Similarly, if the yuan becomes an international financing currency, Chinese firms do not have to borrow US dollars and suffer foreign exchange losses in case of exchange rate fluctuations.

Once the yuan becomes a reserve currency for other economies, China's macroeconomic policies will influence the world economy.

The obstacles to yuan internationalization come from financial reforms including the interest rate liberalization that were only half done and the limited size of China's capital market. As such, if internationalization is pushed too far, and the capital account is opened indiscreetly, hot money will flow in to pursue higher rates in China, which will further inflate property prices.

Meanwhile, if the yuan is depreciating against other currencies, capital will flow out of China, leading to a financial crisis.

Lian Ping

Chief China economist at Bank of Communications

Lian Ping



Given China's gradual opening-up of its currency account by 2020, a market-driven exchange rate regime reform, its status as the world's second-largest economy as well as its top position in trade, the yuan will inevitably be one of the major international currencies in the long run.

Internationalization should be done in a natural way that matches real demand for the yuan.

Risks may exist in the process of yuan flowing back to China. As the offshore yuan does not react to the domestic macroeconomic policies, this will lead to a mismatch between the onshore and offshore yuan pricing. The exchange rate of offshore yuan will influence that of onshore yuan, putting pressure on the onshore economic policies.



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