Yuan internationalisation runs into some problems

For the last couple of years the grand panjandrums of Hong Kong's banking sector have banged on relentlessly about how the internationalisation of the yuan is our financial future.

This column has long been sceptical, even when scepticism has been a lonely stance.

Now, however, Monitor has some weighty company. In a new research paper for the Asian Development Bank Institute, Yu Yongding, a former member of the People's Bank of China's monetary policy committee, highlights some of the problems Beijing is running into in its attempts to promote the yuan as a favoured currency for international trade and investment.

Yu points out that while some companies have adopted the yuan as the currency in which they settle international trade deals, those deals are still overwhelmingly invoiced in US dollars. In other words, although people may be paying in yuan, no one is actually pricing anything in the Chinese currency.

What's more, the only reason companies have been settling deals in yuan is to take advantage of a straightforward exchange rate arbitrage.

By far the biggest users of the yuan for trade settlement have been Chinese importers. They don't want to price deals in yuan, because if the currency rises, they will suffer an exchange rate loss. But they have been happy to pay in yuan, because expectations of its appreciation have meant that for the most part the yuan has traded in Hong Kong at a premium to the official rate.

As a result, over the last couple of years, paying in yuan has paid a return to Chinese importers. Meanwhile, those yuan have simply been channelled back to the mainland as capital inflows, exacerbating China's balance of payments imbalance.