Yuan’s star rises, but it won’t eclipse the US dollar … yet, say analysts
China-led Asian bank will boost popularity of renminbi, but global 'redback' seen as unlikely
The yuan will become more popular with the launch of the Asian Infrastructure Investment Bank and initiatives such as the Silk Road Fund, analysts say, as China seeks to diversify its US$3.7 trillion foreign exchange reserve to cut reliance on US dollar assets.
But analysts doubt the “redback” will take over the dollar’s leading role in the global monetary system any time soon.
That’s despite strong warnings from observers such as former US Treasury secretary Larry Summers, who declared that the United States had lost its role as the underwriter of the global economic system after China lured many of Washington’s closest allies to join the AIIB.
By 2020, the share of trade settled in yuan will account for half of China’s total trade, according to a prediction made by HSBC last month. Last year it accounted for a little more than one-fifth, and at the end of 2012 it accounted for 12 per cent.
“We think the globalisation of China’s direct investment capital flows will become an important factor behind the internationalisation of the RMB,” said HSBC economists led by Qu Hongbin in a report. “This will help generate higher returns on China’s large stock of foreign reserves”.
Now the fifth-most used currency in global payments, the yuan has the opportunity to be used in loans or bonds issued by the AIIB to fund regional infrastructure projects. Asia alone has an annual funding gap estimated at US$800 billion for such projects.
More offshore yuan clearing centres may emerge, adding to those already open in Asia, Europe and North America. More bilateral currency swap deals are expected to be inked with China.
People’s Bank of China deputy governor Yi Gang confirmed to Economy & Nation Weekly that China planned to direct more of its forex investment to countries and regions covered by the “One-Belt, One-Road” strategy, although he said return on the forex reserve investment, heavily weighted in US dollar-denominated assets, had been sound.
Hong Hao, chief China strategist for Bocom International, said: “The AIIB initiative is an assault on the post Bretton-Woods system.”
“We believe the yuan’s role in these investments through the AIIB, as well as the gradual decline of the recycle loop from China’s current account to the US treasury to found a new yuan hegemony, have more significant implications” than just an infrastructure investment opportunity, he said.
However, Hong said any significant changes would take a long time as the initial size of overseas investment that the AIIB would make would be small.
Over the past few decades, China has accumulated the world’s largest forex assets through frequent central bank intervention in a bid to avoid a strong yuan from hurting exporters’ competitiveness. But the huge forex assets have also become a burden for Beijing in recent years, with the country no longer as thirsty for foreign currencies as it was decades ago.
But Chinese central bank officials have insisted they aren’t in a rush to push for the yuan’s globalisation, as how quickly its use will be expanded largely depends on demand.
Debate intensified during the global financial crisis about reforming the international monetary system as the crisis dealt a hard blow to both the US economy and the dollar.
Rather than promote the yuan as a rising star to replace the dollar, central bank governor Zhou Xiaochuan has advocated boosting the status of the Special Drawing Rights (SDR) as a super-sovereign reserve currency.
“Special consideration should be given to giving the SDR a greater role,” he said in an article in 2009, referring to the basket of reserve currencies created by the International Monetary Fund.
Zhou had made it clear that Beijing wanted to introduce “more multilateralism”, rather than to establish a new system, Citigroup economist David Lubin said. “The argument that the AIIB is the stepping-stone to create an alternative to the Bretton Woods system … is wrong,” he told the South China Morning Post.
Beijing’s near term goal is to push for the yuan to be included in the IMF’s SDR basket in October. The basket is comprised of four currencies: the dollar, the sterling, the yen and the euro.
According to a survey of 72 central banks responsible for US$5.9 trillion in reserves, the yuan is expected to represent 10 per cent of global reserves by 2025, up from a 2.9 per cent share by the end of this year.
More than half of the central banks said they were either investing in yuan assets or considering to do so, although they retained concerns over its convertibility, the liquidity of markets, and the quality of credit in some cases, said a joint report by Central Banking and HSBC on April 13.
However, risks remain. Peking University Professor Huang Yiping said the yuan’s globalisation and China’s successful execution of its overseas investment plans faced several challenges. Some high-profile development plans rolled out domestically had failed to generate sound returns, he said.
The “Go West” drive unveiled in 1999, for example, which drove trillions of yuan into infrastructure and other projects in China’s poor, western region, turned out to be disappointing. The region generates only a fifth of China’s gross domestic product.
“Despite strong determination, we could lack efficiency and quality,” Huang said. “If the old mindsets are followed, the new go-out plans may become just an international version” of the earlier drive.