MNI EXCLUSIVE: China To Focus Yuan Drive On Asia, Advisors Say

     BEIJING(MNI) - China will expand trade and investment in Asia in order to

promote the use of the yuan in payments at a time when the coronavirus pandemic

is prompting calls for a reduction in the Chinese share of supply chains, policy

advisors told MNI, although they cautioned that full internationalisation of the

currency would require exchange rate liberalisation and looser capital controls.

     Boosting trade with ASEAN+3, which includes Japan and South Korea together

with China itself, to over 50% of China's total commerce would potentially be a

tipping point, with the countries shifting towards using the region's own

currencies for intra-bloc transactions, said Tu Yonghong, vice-director of the

International Monetary Institute at Renmin University of China.

     ASEAN became China's largest trade partner in the first quarter, displacing

the EU and representing 15.1% of the country's total foreign commerce, General

Administration of Customs data shows. Japan and South Korea between them

accounted for another 13.7%.

     Countries included in the Belt and Road programme will also be a focus of

the yuan drive, advisors said.

     --COMMODITY PRICING

     China has already started to price commodities in yuan, including iron ore,

gold and crude oil. It is set to enhance payment systems, credit support and

settlement services, Tu said. As China's economy recovers from the pandemic more

quickly than elsewhere, relatively high-returning yuan-denominated assets will

become more attractive, she noted, although she added her voice to those calling

for more transparency in exchange rate formation to win the market's trust.

     Increasing the yuan proportion of partner countries' foreign exchange

baskets could prompt a higher weighting in the International Monetary Fund's

Special Drawing Rights, said Zhang Yongjun, deputy chief economist at the China

Center for International Economic Exchanges.

     The SDR is an international reserve asset which in the past China has

promoted as a potential alternative to the dollar, amid continuing concerns in

Beijing that the value of the country's vast holdings of U.S. Treasury bonds

might be eroded by ultra-easy monetary policy.

     Before any concerted drive towards promoting yuan use abroad, China will

have to decide on how much it is prepared to loosen capital controls and

liberalise its exchange rate, said Yu Yongding, a former member of the People's

Bank of China's monetary policy committee, noting that an internationalised

currency should be used for invoicing, and not just for settlement.

     --DOLLAR ASSETS

     For Yu, an urgent task for the country should be reducing its dollar

assets, given the pressure the greenback will face from Fed quantitative easing,

and also the danger that China's holdings abroad could be seized.

     China should use its more-than-sufficient reserves of foreign currency to

buy U.S. goods, reducing the politically sensitive trade surplus, Yu said. For

the meantime, capital management remains necessary, while the exchange rate

should be liberalised as much as possible.

     China has freed most items in capital account management, but exchange rate

management remains opaque and it retains controls over short-term capital flows

and high-leverage derivative trading.

     Another challenge is that a swift increase in the yuan's international

presence could prompt the currency to strengthen, hitting exporters already

suffering from coronavirus disruption and sliding international demand, said

Chen Daofu, deputy director at the Financial Research Institute of the

Development Research Center of the State Council.

     Any appreciation beyond 6.6 to the dollar would hurt exporters, said Zhang

Ming, a senior fellow at the Institute of World Economic and Politics under the

Chinese Academy of Social Sciences. The currency, which traded at 7.08 in

onshore markets on Friday, should remain within a range of 6.6-7.1 during 2020,

he said.

     China first announced its intention to promote yuan internationalization in

2009, launching an international payment function. Payments peaked in 2015, when

the country shocked markets with a sudden devaluation. The yuan's share of

global payments by value was only 1.85% in March, compared with 44.1% for the

U.S. dollar and 30.8% for the euro, according to bank messaging network SWIFT.

     But Asian trading companies have increased the use of the yuan for payment

during recent months' dollar liquidity crunch, according to Deutsche Bank in a

recent note. China is the largest trading partner for most Asian countries and

the PBOC has established bilateral currency swaps with most of them. The U.S.

Federal Reserve in March established temporary swap lines with the Bank of Korea

and the Monetary Authority of Singapore for a maximum of up to USD60 billion

each.

     The country's drives into the cyber economy and mobile payment, soon to be

reinforced by a digital currency backed by the PBOC, should also enhance the

yuan's attractions, while the high-tech infrastructure drive included in this

year's anti-coronavirus stimulus should provide a boost to digital trade

facilities, according to Tu.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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