Propping up China’s yuan hindering efforts to make it international currency, says economist
Beijing also seems in less of a hurry to promote the yuan as an equal to the dollar and other major currencies in global transactions, says analyst
The Chinese yuan exchange rate has been stable, but it won’t always be and Beijing’s efforts to maintain its stability could hinder China’s global currency ambitions, an economist with Standard Chartered said.
Kelvin Lau, a senior China economist at the bank, said in an interview with the South China Morning Post that the yuan exchange rate was still subject to swings in the value of dollar and political risks in the European Union.
Beijing’s efforts to defend the value of the yuan had also almost stalled the process of making it a global currency, he said. “Admittedly the priority of yuan internationalisation is becoming lower on China’s policy agenda,” said Lau.
The Chinese government’s handling of its currency, from opaque tweaks of the yuan exchange rate mechanism to draconian capital account controls to stem the flow of cash out of the country, has successfully “defeated” speculators who tried to bet on a weaker yuan.
At the same time, Beijing’s interventions have also invited fresh scepticism over how serious China is committed to free market reforms.
The International Monetary Fund’s decision to grant the yuan a nominal reserve currency status in 2015 failed the intention of making the currency more “freely usable” and the share of the yuan in international settlements has now dropped to seventh position, falling behind the Canadian dollar.
When a bond connect scheme was launched between Hong Kong and China on Monday, a move hailed by Beijing as a big step in opening up its domestic financial markets, the initiative was designed as a one-way channel – investors in Hong Kong can buy bonds in China’s interbank market but not yet the other way round.
“Hong Kong is a middleman for foreign money to access the onshore market,” said Lau.
As a barometer of investor appetite for yuan assets, deposits of the currency in Hong Kong have shown signs of stabilisation in recent months, although the level of 524.8 billion yuan (US$77.4 billion) at the end of May was about half the peak of three years ago.
Lau said Hong Kong market players had “spent quite a lot of time” to understand the yuan exchange rate mechanism and it was “only until recently – since the start of the year – that the market felt comfortable with the system”.