China’s yuan: Beijing to build solid ‘breakwater’ to curb risks amid accelerating internationalisation push

Central bank to pursue global use of yuan while maintaining stability after Xi Jinping said it should be conducted in a ‘steady, prudent and solid’ manner
It will also support more overseas central banks, international development institutions and multinational enterprises to issue panda bonds

Yuan

Ji Siqiin Beijing

Published: 12:00am, 11 Nov 2023

Why you can trust SCMP

Despite an accelerating pace of yuan internationalisation in the past year, Beijing has cautioned against imprudence by prioritising security amid rising external uncertainties.

In a column published on Thursday, China’s central bank vowed to pursue progress in the global use of yuan while maintaining stability, and also continuously improving the capabilities of management and risk prevention of cross-border capital flows under the condition of opening up.

“At present, the pace of diversification of the international monetary system is accelerating, business entities have increased endogenous demand for the use of yuan, and the international environment is also complex and ever-changing,” the People’s Bank of China’s (PBOC) said in the article.

“[We must] build a solid ‘breakwater’ … and maintain the bottom line of preventing systemic financial risks.”

The general impression is that to prevent risks, supervision must be strengthened

Ding Shuang

The article came as President Xi Jinping said that promoting yuan internationalisation should be conducted in a “steady, prudent and solid” manner at the twice-a-decade central financial work conference last month.

The previous wording only included “steady and prudent”, but by adding “solid”, the overall tone is becoming more conservative, suggesting risk prevention will be prioritised, said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

“So the general impression is that to prevent risks, supervision must be strengthened, and financial opening must be promoted in a solid manner,” Ding said.

“That is, it is not about speed, but it is about steadiness.”

Yuan gains currency at Canton Fair, but export orders lag pre-Covid levels

Despite the yuan’s depreciation against the US dollars, its overseas use – especially in trade settlements – has gained notable progress this year, as geopolitical tensions such as the Ukraine war and high interest rates in the United States helped Beijing to expand acceptability overseas.

In the first nine months of the year, the yuan’s cross-border settlement volume for goods trade between China and Belt and Road Initiative countries increased by 66 per cent, year on year, according to the PBOC.

But it has yet to challenge the hegemony of the US dollar, with the yuan accounting for a record 3.71 per cent of global payments by value in September, compared to 46.58 per cent for the US dollar, according to financial messaging service Swift.

The PBOC said in the article that it would support more overseas central banks, international development institutions and multinational enterprises to issue panda bonds – yuan-denominated bonds by foreign issuers, while promoting the healthy development of the yuan’s offshore market.

The idea is to make Hong Kong’s yuan-dominated risk management products more and more extensive

Paul Chan Mo-po

Hong Kong’s financial secretary, Paul Chan Mo-po, said on Wednesday that the city is set to play a bigger role in yuan’s further internationalisation push.

The city is a key offshore yuan business hub, with some 75 per cent of all global yuan offshore cross-border payments passing through Hong Kong, he said.

“The idea is to make Hong Kong’s yuan-dominated risk management products more and more extensive, so that after investors get overseas yuan, they will have investment channels and risk management channels, and they will be more willing to use yuan,” Chan said during the Financial Street Forum.

“Thus, it is an important step to help the internationalisation of the yuan.”