AIIB decision to use US dollars for loans not a response to recent slide in yuan

By Hu Weijia Source:Global Times Published: 2016-1-17 22:58:02

The China-led Asian Infrastructure Investment Bank (AIIB) will issue loans denominated in US dollars rather than China's yuan, AIIB President Jin Liqun told a press conference Sunday. The announcement exacerbated market pessimism following the yuan's recent tumble and triggered heated discussion online, with some suggesting that the government might be concerned about the yuan's weakness.

Many analysts forecast last year that the China-initiated development bank would issue yuan-denominated loans to promote use of the yuan and challenge the US dollar's hegemony, so the announcement has been seen by some observers as a response to the recent depreciation of the yuan, which appears to be forcing a slowdown in the process of the yuan's internationalization.

However, there is not necessarily any connection between the AIIB's decision and the yuan's recent slide. Jin told the European Union Chamber of Commerce in China (EUCCC) in December that the US dollar would be the currency used for AIIB loans, so Sunday's official announcement wasn't a hasty decision made at time when the yuan is facing depreciation pressure.  But the speech to the EUCCC did not gain wide public attention.

It is understandable that the AIIB has chosen to lend in US dollars instead of the yuan, given the dollar's high level of acceptance among global investors and the fact that the equity capital raised by the new bank has been mainly in dollars so far.

Analysts say loans denominated in other currencies would have presented challenges since most member countries tend to contribute equity in dollars, the Financial Times reported on Sunday.

Besides, the funds that the AIIB raises from the international markets in the future are expected to be mainly in US dollars too.

Jin said Sunday that the AIIB may raise capital from the international markets in US dollars, euros, yuan and other currencies.

To avoid possible losses caused by exchange rate fluctuations, the new bank may gradually move toward a mix of currencies when the euro and yuan make up a higher proportion of the total funds that the AIIB raises.

The establishment of the AIIB will still be conducive to the Chinese currency's internationalization, but that doesn't mean the new bank will be used by Beijing as a tool to promote yuan-denominated financial products and boost China's influence.

The international prestige of the Chinese currency will be determined by China's economic strength and the continuous growth of its foreign trade, rather than efforts by financial institutions and political intentions.

The AIIB's announcement to lend only in US dollars is in line with the bank's claim that it will be operated according to business principles, and the financial markets should not read too much into it.

The author is a reporter with the Global Times.

Posted in: Commentary, It's Your Business

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