MNI EXCLUSIVE: Shanghai Mooted As Driver Of Global Yuan

Shanghai is maneuvering to become the major beneficiary of Beijing efforts to build yuan usage in international trade, hoping to take advantage of China's swifter recovery from the Covid crisis speeding up closer regional commercial ties, academics have told MNI.

Setting up Shanghai as an offshore financial center and at the heart of the yuan internationalisation strategy is under discussion by financial scholars, said Yang Di, a researcher at the Shanghai Academy affiliated to China Association of Social Science and Shanghai city government.

He points to two advantages if Shanghai competes with existing international hubs in New York, London and Hong Kong: more effective control of the Covid-19 outbreak and the steady social order.

Yang acknowledges that other countries realized full currency convertibility and free capital flows before promoting offshore currency services. But he sees China as able to promote yuan internationalization and offshore yuan services together through reform and innovation.

At the same time, according to Yang, the yuan's administered exchange rate formation mechanism is functioning well, allowing for the market's role while maintaining currency stability, so there is little urgency to overhaul the system.

Tu Yonghong, Vice Director of the International Monetary Institute at Renmin University of China, suggested that Shanghai could focus on the yuan-dollar pairing, building on existing onshore yuan issuance, trading and clearing activities which make it a convenient location to unify the rules. Hong Kong could then focus on its natural advantages in facilitating the trading over overseas foreign exchange.

ONE BELT ONE ROAD

Tu sees short and long-term trends supporting expanded yuan trading internationally. Over the next two years, more immediate factors such as the Chinese economy's faster emergence from the Covid crisis, underpinning wider interest rate differentials with the U.S., should bolster commodities trade invoicing in yuan and the attraction of the yuan-denominated assets, before the People's Bank of China's global lead in developing the yuan as a digital currency comes into play over time.

Moreover, the increasingly palpable change in China's trade dynamics as most countries in ASEAN now form the world's second largest economy's biggest trade partner of China should see the region increasingly willing to peg currencies to the yuan, Tu said.

She sees a putative regional currency zone pegged to the yuan already in formation with the Regional Comprehensive Economic Partnership coming closer to fruition and the strengthening of commercial ties through Beijing's One Belt One Road investment initiative.

TAKING ON THE DOLLAR

Zhong Hong, Deputy Manager of the Institute of International Finance with Bank of China, expressed concern that the yuan may face fiercer competition as an international currency after the Covid-19 pandemic, as many investors and treasurers were pulled back to the dollar's safe-haven function and the greater infrastructure benefits it holds.

She suggested that China could increase currency swaps with countries in ASEAN and those involved in the OBOR initiative, injecting ample liquidity into the offshore market and accelerate the opening up of its domestic bond market in a bid to deepen the yuan's international use. Beijing could also help forge a new currency zone by encouraging ASEAN countries to issue more yuan-denominated Panda bonds and offering more yuan products to OBOR countries, she added.