MNI: Reserve Fears Boost Calls For Yuan Globalisation-Advisors

Western sanctions imposed on Russia’s financial system are likely to fuel demand for yuan amid heightened concerns about the safety of foreign reserves, policy advisors in Beijing told MNI, calling for rules on capital management to be loosened to facilitate such flows but adding that China’s own forex stockpiles may continue to grow.

There has long been a constituency in Beijing arguing for an easing of controls in order to boost international usage of the yuan, and some advisors are pointing to the freezing of Russian reserves as a reason to redouble efforts to build it into a reserve currency. While authorities are not going to make the capital account fully convertible in the foreseeable future, more supply of yuan-denominated financial products would combine with its use in trade to boost its status, advisors told MNI.

Restrictions should be eased on companies issuing offshore yuan-denominated bonds and on cross-border yuan lending by financial institutions, said Tu Yonghong, deputy director of the International Monetary Institute, a prominent think tank at China Renmin University.

Chinese companies operating abroad should also be encouraged to use yuan when trading with the mainland and with countries participating in the Belt and Road scheme, she said, adding that the promotion of more digital platforms for trade and payment with e-CNY would help boost foreign usage.

Growing domestic demand should also drive rising imports, particularly from China’s neighbours, permitting the development of a regional yuan zone, said Gao Haihong, a senior fellow of Institute of World Economic and Politics at the Chinese Academy of Social Sciences. The launch of the 15-member Regional Comprehensive Economic Partnership should favour this process, she said, adding that currency swap agreements, signed with 40 countries to a value of CNY3.99 trillion by the end of 2020, would back up a yuan zone by providing liquidity when necessary.

CIPS

Newly-created free-trade zones, in regions including Shanghai and Hainan, have provided examples of lifting capital management rules and promoting the flow of yuan from trade into foreign investment in financial products, according to Gao, who also recommends further expansion of the the Cross-Border Interbank Payment System, which was launched by the People’s Bank of China for yuan clearing and settlement services and is mainly used by China’s Asian partners so far.

Cross-border portfolio investment settled in yuan totaled CNY16.5 trillion in 2020, up 73.6% on annual basis, according to the most recent PBOC data. Offshore yuan cash pools already totaled CNY2.54 trillion by the end of 2020, up 40% in a year.

Higher purchases of yuan assets will also drive hedging in the currency, indicating the rising attractiveness of the yuan-denominated assets, Gao added.

EXCHANGE RATE STABILITY

A relatively stable exchange rate against other major currencies and IMF Special Drawing Rights will be fundamental in consolidating the yuan’s global use, advisors said.

While the PBOC has moved to allow more flexibility in the yuan’s level, advisors said it is unlikely to tolerate sharp one-way moves. The country’s capital markets are still far from mature and require protection against outflows such as those seen in 2015 and 2016, which led to tighter controls, Gao noted.

In the meantime, even as it pursues a greater role for its own currency, China’s accumulation of foreign reserves is likely to continue until such time as it succeeds in its moves to boost internal demand and imports in line with its internal circulation strategy, she said.

With China already holding over USD3.2 trillion in foreign reserves, and with about third of those in U.S. Treasuries, advisors in Beijing have watched with discomfort at the ease with which U.S.-led sanctions deprived Russia of the use of its reserve pile.

One realistic strategy might be for China to increase the potential cost of any such moves against it, by consolidating economic links with western countries, including by strengthening trade, and by encouraging its companies to borrow in dollars and to establish operations in China, another policy advisor said, requesting anonymity.