China’s yuan internationalisation strategy needs ‘persistent, strong foreign demand’
- Renmin University vice-president Liu Yuanchun believes China should look to drive demand for yuan-denominated assets as part of its internationalisation strategy
- Renmin University on Saturday will release its yuan internationalisation index, which measures the popularity of the currency
China should focus on increasing the soft power of the yuan as part of its internationalisation strategy, rather than looking solely at the liberalisation of its restrictions on the capital account, according to a senior government adviser.
Renmin University vice-president Liu Yuanchun said China should look to drive demand for yuan-denominated assets to support internationalisation.
“The strategic adjustment is not to turn to the capital account, nor make it fully open,” he told a closed-door lecture organised by the Institute of Finance under the Chinese Academy of Social Sciences this week.
“Instead, it should aim to generate persistent and strong foreign demand for the yuan by enlarging the domestic market and increasing the pricing power of key technologies.”
On Saturday, Renmin University will release its yuan internationalisation index, which measures popularity of the currency in trade, investment, payment, foreign exchange trading and central bank reserves.
Last year at the height of the coronavirus pandemic, the index rose to a record high of 5.53 from 3.03 at the end of 2019, but the yuan’s popularity still lags behind the US dollar, euro and Japanese yen.
The index fell back to 4.55 at the end of September last year, although this was still 42.16 per cent higher than a year earlier, Liu said in his speech on Monday, which was published online on Tuesday.
However, it still has some way to catch up with major international currencies. Taking the global payment value as an example, the yuan ranked only fifth with a share of 1.95 per cent in May, compared with 40 per cent for the US dollar, 34.4 per cent for euro and 3.18 per cent for the Japanese yen, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the world’s largest international payment communications network.
The Chinese authorities started to promote trade settlements in yuan in 2009, achieving a milestone in 2015 when it was included into the International Monetary Fund’s currency basket. The pace, however, has since slowed due to deprecation of the yuan and moves by authorities to redeploy capital controls to defend its value.
The fall of yuan’s proportion in international lending and bond issuance partly reflects the US’s political containment efforts, which stem from human rights concerns and a push for supply chain diversification, added Liu.
“The internationalisation doesn’t simply rely on trade, investment and the proportion of outbound investment. More importantly, it must turn itself into a world power, so that it can have controls over economic development, financial pricing and a variety of political and military risks,” he said.
China’s financial opening, economic prospects and interest rate gap caused by the monetary policy divergence led to massive capital inflows into the world’s second largest financial market in the past two years.
Shanghai, which previously set its sights on rivalling New York and London as an international financial centre, has been re-branded as a global yuan assets centre.
“Its functions in global yuan allocation, pricing and risk management keep improving,” Wang Xin, head of the research bureau at the People’s Bank of China, said on Tuesday.
“We’ll support Shanghai to pilot the free use of yuan … And make it an important bridge between international and domestic markets.”