What’s Stopping More Foreigners From Using the Yuan? In Part, It’s China, Experts Say
China’s progress in promoting the international use of its currency is facing challenges from rising China-U.S. tensions and regulatory curbs on capital flows, multiple experts said.
China has been accelerating efforts over the past few years to encourage more foreign investors and central banks across the world to hold the yuan, as part of Beijing’s ambition to expand its global influence. Cross-border use of the yuan has been growing, but still makes up only a fraction of the global market.
In a meeting in the southwestern city of Chongqing on Tuesday, multiple financial experts said the internationalization of the yuan has entered a new stage of development given the major changes inside and outside of China — changes that also pose new challenges to the process.
Given the rapid development of China’s economy, the U.S. has come to see China as its major competitor and has begun cracking down on the latter in many aspects, said Zhang Liqing, chief economist at accounting firm PricewaterhouseCoopers China. For example, the U.S. criticized and suppressed China’s investments in countries involved in the Belt and Road infrastructure initiative, which China hopes can be a bright spot in its efforts to promote internationalization of the yuan.
That stands in contrast to the friendly China-U.S. relationship a decade ago, when the U.S. supported increasing China’s funding quota and voting power in the International Monetary Fund (IMF), Zhang said. The U.S. also voted for the yuan to be included in the IMF’s Special Drawing Rights (SDRs) currency basket, an international reserve asset launched in the late 1960s to supplement IMF member countries’ official reserves.
As the trade war heated up in 2019, the trading volume of the yuan in the U.S. made up 7.8% of the total outside the Chinese mainland, down from 8.5% the previous year, according to a report released by China’s central bank in August.
In addition, since 2016, China has largely maintained its policy stance on restricting capital outflows from the country and boosting foreign capital inflows to prevent sharp depreciation of the yuan. That created hurdles for free capital flows, Zhang said.
Lu Zhengwei, chief economist at Industrial Bank Co. Ltd., called for the government to reduce regulatory curbs on capital flows and to unify regulations for cross-border use of the yuan across the country, especially in pilot free trade zones.
The internationalization of the yuan still has a long way to go. By the end of 2019, yuan assets ranked fifth among foreign-currency reserves held by about 150 economies, but only accounted for 1.95% of the total, according to IMF data.
The undeveloped foreign exchange derivatives market in China is another key reason why some traders and investors at home and abroad are unwilling to use the yuan for settlement, investment or financing, because they cannot effectively hedge against risks associated with exchange rates, Zhang said.
Experts said in the Tuesday meeting that foreign investments in China’s domestic capital markets have become a major driver of cross-border use of the yuan, especially the bond market. But the problem is that policymakers have not opened up the market enough. By the end of October, overseas investors held 8% of Chinese central government bonds, up from less than 1.2% at the end of last year, but still lagging far behind the 30%-plus figure in the U.S., according to Zhang.
Zhang called for further opening of China’s financial markets. That requires Chinese regulators to have better macroeconomic regulation and financial supervision, said Chen Daofu, a deputy director of the finance research institute of the State Council’s Development Research Center.
Contact reporter Tang Ziyi (email@example.com) and editor Michael Bellart (firstname.lastname@example.org)
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