China must loosen capital curbs to boost international use of yuan, says former bank executive
- Former Bank of China executive says increasing yuan use ‘increasingly urgent and important strategic issue’ given possible US move to curb dollar access
- Currency now accounts for less than 2pc of international payments by value
China needs to increase international use of its currency so that it can lift the yuan’s share of international payments, according to a former senior executive at one of China’s big four banks.
Despite China’s growing influence in the global economy and trade, there is a “big gap” when it comes to the use of the yuan in foreign trade, investment, and financial transactions, said Wang Yongli, a former vice-president with the Bank of China and a former board member for Swift, the international financial payments system.
Wang’s arguments, made in a newspaper article, come amid growing concerns in China that the US will freeze institutions and individuals out of the dollar payments system.
Following the introduction of a national security law in Hong Kong, Washington said it would penalise individuals who helped undermine the city’s autonomy and punish Chinese financial institutions that continue to do business with them.
The yuan currently accounts for only 2 per cent of international payments by value, but Wang argued that this figure should pass 10 per cent in the next decade.
“The internationalisation of the yuan needs to be further accelerated,” Wang wrote in the Beijing-based newspaper The Economic Observer on Saturday, adding that the promotion of the yuan in international transactions is now an “increasingly urgent and important strategic issue” because “global powers are shifting from cooperation to confrontation” with China in financial matters.
“Of course, while the coronavirus pandemic has accelerated the profound changes in the world order, it has also further aggravated the conflicts among major countries.
“The United States missed the best time to fight the epidemic, its economy, society and international reputation was impacted, and it happens to be a very complicated presidential election year. Social conflicts have been triggered, which has made the relationship between major powers more uncertain,” Wang said.
Wang argued that China will have to be able to handle larger flows of capital into and out of the country to increase the use of the yuan in global transactions, but this will introduce bigger volatility in the exchange rate and affect the stability of its own financial markets and economy.
“This puts forward greater requirements for the [Chinese] central bank to enhance its global currency supply and liquidity management, which brings greater challenges and pressures, and can easily lead to serious currency over-issuance, pushing it into zero interest rates, negative interest rates and quantitative easing. In this regard, China still lacks experience,” said Wang.
He continued that China needs to speed up its financial market reforms to shift the focus of promoting the internationalisation of the yuan from offshore centres to domestic locations.
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In 2015, amid a slowing economic outlook, the People’s Bank of China made an unexpected decision to allow the yuan to become more market determined, allowing a one-time depreciation of nearly 2 per cent against the US dollar.
But the move triggered a sharp fall in the value of the yuan and boosted expectations for further depreciation, leading to massive capital outflows in a short period of time.
Almost US$1 trillion of funds left China between the middle of 2014 and early 2017 and China’s foreign reserves shrunk accordingly after the one-off yuan devaluation as it was forced to sell dollars to defend the yuan.
Subsequently, Chinese regulators imposed strict new measures to stem capital outflows, halting efforts to liberalise the capital account.
The yuan is currently the fifth most actively used currency in global payments by value, with a share of 1.91 per cent, according to Swift, compared with 39.7 per cent for the US dollar, 34.1 per cent for the euro, 6.9 per cent for the British pound and 3.4 per cent for the Japanese yen.
It has been included in the International Monetary Fund’s symbolic Special Drawing Rights basket of currencies since 2016.
The central bank has said China should be the first to launch a central bank digital currency, which it hopes will promote the use of the yuan but Wang said such a move would not make a significant difference to increasing its share of international payments.
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“Without sufficient comparative advantages, it [the yuan] will not be widely recognised and accepted by the international community. It is difficult to achieve expectations by relying solely on one’s own enthusiasm to promote the internationalisation of the yuan. Even if it [China] is the first to launch a digital yuan, it cannot be assumed that the first to launch a digital currency will inevitably seize the high ground status of an international digital currency,” Wang said.
Wang said China needs to learn from past experience and set clear targets for expanding international use of the yuan.
“If 2020-2029 is regarded as the second decade of yuan internationalisation, by 2029, the yuan’s market share of international currencies should exceed 10 per cent, reaching around 11 per cent, surpassing the Japanese yen, British pound and other national currencies, becoming the third largest international currency after the US dollar and the euro,” Wang argued.