Macroscope | Yuan will need room to spread its wings in Year of the Rooster

While Beijing will no doubt be hoping for economic stability this year as it prepares for the 19th Communist Party Congress, the construction of a framework for the internationalisation of the yuan needs to continue regardless, if only as an insurance policy against unexpected developments on the global economic scene.

Not knowing whether United States president-elect Donald Trump’s tweets will prove worse than his bite, there is surely anyway a need to address the reality that China remains over-dependent on US dollar-denominated credit to finance its continued economic expansion, leaving the Chinese economy vulnerable to the vagaries of US policy.

As a Bank for International Settlements Working Paper (BISWP) concluded on December 30 “monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own.”

That conclusion applies particularly to US monetary policy with data cited by the BISWP showing that 47 per cent of global cross-border bank lending was made in US dollars as at the end of 2014.

The internationalisation of the yuan, surely an inevitability anyway given the size of the Chinese economy, will ultimately reduce China’s, and perhaps the world’s reliance on the US currency, whether that be for the pricing of commodities or energy or indeed for loans to finance economic expansion.

And while that prospect will not appeal to those in Washington who grasp that the dollar’s current global hegemony has long fueled the US’ capacity to live beyond its own means, it is inconceivable that the yuan, the currency of the world’s second-largest national economy, is not going to move closer to the centre of the world stage.