MNI INTERVIEW: Wider Yuan Use Needs More Assets, Offshore Hubs

A former People’s Bank of China deputy governor said further opening of China’s financial markets and the creation of more offshore yuan hubs were needed to attract central banks and foreign investors to hold yuan-denominated assets and grow the international use of the currency.

China should focus on increasing transactions of yuan-denominated assets, improving financial infrastructure and facilitating cross-border use of the currency to promote the yuan’s globalisation, wrote Chen Yulu, deputy of the 14th National People’s Congress and former deputy governor of the PBOC, in a written interview with MNI.

“China will open up more sectors of its markets to overseas investors and increase financial products to create a positive impression that foreign entities can conveniently allocate and hold yuan-denominated assets, and attract central banks and monetary authorities to hold the yuan as reserve assets,” wrote Chen, president of Nankai University and a member of Central Financial and Economic Affairs Commission.

More global yuan offshore hubs would be built, the economist said, suggesting regional offshore yuan markets could be established in Central Asia, Africa, South Asia, and South America to serve local demand for yuan settlements.

China should pursue measures to price and settle its bulk commodities imports in yuan, Chen noted. Chinese authorities could broaden the applications of the digital yuan, or e-CNY, and promote the research and launch of wholesale uses of the e-CNY, he said. (See MNI: China Needs Yuan Asset Pool To Drive Currency Ambitions)

“The use of e-CNY in scenarios like cross-border trade and supply chain financing should be promoted in an orderly manner in a bid to give full play to the comparative advantages of e-CNY in cross-border transfers and payments,” he pointed out.

GLOBAL EXPANSION

The global expansion of Chinese financial institutions should be accelerated to “expand yuan-denominated business and consolidate the network effects of yuan internationalisation”, said Chen. “In foreign areas with financial restrictions, models of cooperating with local institutions or shareholding should be encouraged,” he continued.

More yuan clearing banks should be set up to provide sufficient liquidity for overseas markets in countries such as those alongside the Belt and Road Initiative, as well as Africa. The authorities should assess yuan clearing banks to explore the potential to grow their business, he added.

Chen said authorities would expand the use of the Cross-Border Interbank Payment System (CIPS), a system that offers clearing and settlement services in cross-border yuan payment and trade. He expected accelerated adaptation of CIPS to international rules, improved functioning and extended operating hours.

POLICY SUPPORT

“China will create favorable conditions for cross-border yuan settlement from top-level policy design,” said Chen, calling for improved systems to facilitate settlement of the yuan in cross-border investment and financing transactions.

Creating an environment that supports the cross-border use of the yuan will require China to prioritise the use of the yuan as a currency for pricing and settlement in cooperation with other countries, and work to relax restrictions on yuan settlement in countries and regions that have close economic and trade ties with China, he suggested.

At a grass-roots level, he called for a mechanism that could provide feedback to authorities from domestic and foreign firms that encounter issues with yuan settlements.