China’s yuan needs ‘bold breakthroughs’ to make inroads as an international currency: economist

Expert on US-China trade conflicts says Beijing should implement a progressive tax on cross-border capital flows to help guard against external risks

Beijing wants the yuan to play a greater role in global trade, but efforts have been hindered because China’s currency is not nearly as convertible as the US dollar or euro

3-MIN READ3-MIN

China’s yuan still accounts for a small percentage of global trade settlements, relative to the national gross domestic product. Photo: Bloomberg

Published: 9:00pm, 27 Mar 2023

To strengthen the yuan in the international monetary system and counter the US dollar’s global dominance, China must boldly innovate in not only technology but also policy, according to a prominent economist at Tsinghua University.

The proposal by Professor Ju Jiandong, an expert on US-China trade conflicts, came as authorities are beefing up China’s defence and economic response capabilities in the face of the rivalry between the world’s two largest economies.

Meanwhile, Beijing appears to have slowed down the pace of its financial reforms, while staying on high alert to both domestic risks and international turbulence, following the sudden collapses of Silicon Valley Bank and Signature Bank in the US.

“Key issues to be considered should be how to establish latecomer advantages and make bold breakthroughs so that China can seize the initiative and get a leg up in international currency competition,” Ju wrote in the March issue of the Chinese academic journal International Finance.

The threat of US financial decoupling has been putting considerable and persistent pressure on China, especially since strategic partner Russia was kicked out of the US dollar system following the invasion of Ukraine last year.

To avoid being financially strangled, China’s policymakers have accelerated the pace of diversifying its forex assets now dominated in the US dollar, while also empowering the home-grown Cross-Border Interbank Payment System and striving to boost the yuan’s use overseas.

However, China’s ambition to build the yuan into an international currency is curtailed by the fact that it is not as convertible as the US dollar or euro, and Chinese leadership also remains concerned about potential financial risk contagions.