MNI EXCLUSIVE: Yuan Internationalisation To Proceed Gradually

     BEIJING (MNI) - China will not rush yuan internationalisation but treat it

as a gradual and long-term strategic target, as it seeks to maintain currency

stability and limit financial risks, economists, officials and government

advisors told MNI.

     Too rapid a push for internationalisation could allow fast expansion of

offshore yuan market which may destabilise the onshore market for the currency,

Lian Ping, chief economist at Bank of Communications, said. Opening up China's

capital account, a necessary precondition for internationalisation, must also be

managed cautiously.

     "Yuan internationalisation will lag China's share of the world economy and

China's economic globalization for a long time," he said, noting that the

process will challenge the dominance of the dollar and meet many obstacles.

     China halted or even reversed moves towards internationalisation from 2015,

when the People's Bank of China started to tighten capital controls to limit

expectations for depreciation of the currency. Officials refer to this cautious

stance of the yuan internationalization using the phrase "canal forms when water

comes."

     Although pressure on the yuan has eased and the country has taken measures

to attract foreign investors, policymakers continue to tread with care. In a

document released in February, the PBOC stressed it would push forward in a

"persistent and continuous" way, but would "control the strength and pace" od

yuan internationalization according to economic and financial circumstances.

     --FOREIGN INVESTORS

     China is taking measures to expand the range of yuan-denominated assets

that foreign investors can hold. Chinese RMB-denominated government bonds and

debt issued by the state-owned policy banks have been included in the Bloomberg

Barclays Global Aggregate Index and MSCI has added more Chinese mainland shares

to its Emerging Markets Index.

     Falling interest rates and a more stable yuan will also prompt foreign

investors to issue more yuan-dominated debt in China, according to Lian.

     "The country has recently started to lift some capital control measures and

financial opening should go before yuan internationalisation," said Chen Daofu,

deputy director at the Financial Research Institute of the Development Research

Center of the State Council.

     Officials also see China's continent-crossing One Belt, One Road Initiative

as a vehicle to spread use of the yuan. This is particularly so because China

will provide investment and loans to countries along the route, said Lian.

     Yang Xiaoping, head of the PBOC's branch in Kunming, capital of Yunnan

province, an important hub for One Belt, One Road, told MNI more policy support

is needed for cross-border yuan payments.

     "The country should persist in moving towards the convertibility of its

current account, steadily open up its capital account and enhance cross-border

yuan payment infrastructure," Yi suggested, although he added that regulations

should be also improved to prevent risk that could be caused by capital flight.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

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

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