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-- PBOC Asking State-Owned Banks to Amass CNY300 Billion Fund for Belt and Road
-- Launch of Yuan-Denominated Oil Futures Market in Shanghai Possible Next Year
BEIJING (MNI) - The Chinese government's push to internationalize the yuan,
which has stalled over the past two years, is likely to resume in 2018 as China
ramps up efforts to implement its Belt and Road Initiative (BRI), President Xi
Jinping's signature foreign policy strategy, Chinese sources told Market News
The People's Bank of China has asked state-owned banks to provide
yuan-denominated funds totaling about CNY300 billion to be granted as loans
mainly for infrastructure projects linked to the BRI, a source with knowledge of
the matter who declined to be identified told MNI. The aim is to increase the
liquidity of the Chinese currency in overseas markets, he said.
"Exactly how the funds would be used is still under discussion, but the
focus would be on infrastructure investment in countries along the Belt and Road
to inject liquidity and expand the use of the yuan overseas," the source said.
"It is seen as an important step to accelerate the yuan's internationalization."
The People's Bank of China did not respond to MNI's request for comment on
BELT AND ROAD INITIATIVE INTERNATIONALIZATION FOCUS
The BRI, previously known as One Belt One Road, was first proposed by
President Xi in late 2013 as a sweeping geopolitical initiative to build
infrastructure that would spur investment and trade in as many as 65 countries.
The Belt part will link China with Europe via several land corridors through
Russia, Central Asia, the Middle East and Central Europe, while the Road, a
maritime Silk Road, would comprise two sea routes - one through the Middle East
and Africa and one linking China to the South Pacific.
The Chinese government hasn't announced any concrete targets for projects
or for the amount of investment required, but as the instigator of the
initiative, it has been at the forefront of efforts to drum up funding, setting
up a special Silk Road Fund, ordering its two biggest policy banks - China
Development Bank and Export-Import Bank of China -- to offer loans and
encouraging the Asian Infrastructure Investment Bank, another China initiative,
to offer loans.
At the Belt and Road Forum in Beijing in May 2017, the government pledged
an additional CNY940 billion, equivalent to $136.5 billion, in financial support
for the initiative, according to HSBC.
PUSING BANKS TO OFFER CNY LOANS BUT FOREIGN DEMAND UNCERTAIN
Nearly all the lending so far has been done in U.S. dollars, with banks
raising money through the issue of dollar bonds overseas or by using their
domestic firepower to offer loans in U.S. dollars. But waves of capital outflows
from mid 2014 to end 2016 saw China's foreign-exchange reserves slump by almost
$1 trillion to $3 trillion, and with the authorities reluctant to see the
reserves drop any lower, banks are being discouraged from offering foreign
Pushing borrowers to use yuan for their BRI projects would get around
domestic restrictions on foreign-exchange transactions and help the government
kick-start its stalled yuan internationalization strategy.
Issuing yuan loans would remove the currency risk on lending for Chinese
banks, but whether foreign borrowers would be prepared to take on the risk
remains to be seen. They may also find yuan loans unappealing, especially as
Chinese interest rates are so much higher than U.S. interest rates.
The U.S. Federal Reserve's federal funds rate target range is currently 1%
to 1.25% and the prime loan rate is 4.25%, while in China, the benchmark
money-market interest rate, the volume-weighted seven-day deposit reverse repos,
stood at 2.8332% on Monday morning and the benchmark one-year lending rate is
"Borrowing costs in yuan are much higher than in U.S. dollars because
China's money market rates are rising under the pressure of financial
deleveraging, which would drag up the actual lending rate in yuan," a manager in
the loans department at a joint-stock bank told Market News. "On top of that,
foreign borrowers have to consider the exchange rate, especially if the yuan
"But Belt and Road is a strategic initiative and the government will have
special policies, so making profits through the yuan loans is not the priority.
Chinese banks may have to offer lower loan interest rate," he said.
MOVEMENT ON OIL FUTURES PRICED IN YUAN
Another sign that the government is ready to restart yuan
internationalization is progress on a long-awaited proposal to set up a domestic
oil futures market open to international firms with contracts settled in yuan
and also to introduce an oil benchmark priced in yuan. The China Daily reported
in September that trials of a digital trading platform were completed in July
and the Shanghai International Energy Trading Center is now awaiting final
approval from the State Council.
Some countries, such as Russia and Venezuela, are already selling oil to
China and accepting yuan, and while most analysts say a domestic futures market
wouldn't be a game changer, it's another incremental step toward
internationalizing the yuan and decreasing the dominance of the dollar.
"One of the main impacts of the proposed new crude futures contract, and
presumably one of the intentions behind the proposal, is that by providing a
yuan-denominated financial hedging tool for crude oil, this will likely help to
promote the appeal of the yuan as a pricing currency in global oil trade,"
analysts at Societe Generale wrote in a report in October.
YUAN INTERNATIONALIZATION STALLED AFTER MID-2015
China's efforts to internationalize the yuan have progressed in fits and
starts over the past decade. The most symbolic move came in November 2015 when
the board of the International Monetary Fund approved the yuan's inclusion in
the basket of currencies used to value its synthetic reserve currency, the SDR,
effective Oct. 1, 2016. But since then, the yuan has retreated from the
international stage as China battened down the hatches in the face of sustained
depreciation pressure on the yuan and surging capital outflows.
Data from the SWIFT global payments network show that the yuan's share of
international payments peaked at 2.79% in August 2015, ranking fourth behind the
dollar, euro and pound. But the PBOC's decision that month to change the way it
set the yuan's daily fixing, which led to a de-facto devaluation of around 2%,
shook global markets and eroded confidence in the currency. The yuan's share
fell to 1.46% in October this year, the third consecutive monthly drop and the
lowest since April 2014. The yuan fell to the seventh most-used currency from
sixth in September.
Although China has opened up the domestic market wider to foreign investors
through initiatives such as the stock and bond Connect programs, it has so far
failed to allow domestic investors to move money overseas and let banks move
more yuan offshore.
International Monetary Fund data show that foreign-exchange reserves held
in yuan were the equivalent of $99.36 billion at the end of June 2017, up from
$84.51 billion at the end of December 2016, although that's only just over 1.07%
of the world's total allocated foreign exchange reserves. Foreign investors
increased their holdings of Chinese bonds for a ninth straight month in November
to CNY936.6 billion ($140 billion), according to China Central Depository &
In contrast, yuan deposits held outside of China, a key element in
internationalizing the currency, have slumped partly due to a decline in
cross-border trade settled in yuan and partly due to the PBOC's restrictions on
domestic banks. In Hong Kong, where the majority of offshore yuan is held,
deposits rose to as high as CNY1 trillion at the end of 2014 but have fallen to
almost half that level in 2017 and stood at CNY535.5 billion in September.
YUAN OFFSHORE LIQUIDITY INSUFFICIENT TO SUPPORT INTERNATIONALIZATION
"The biggest obstacle in the way of yuan globalization is insufficient
stock of yuan deposits in offshore markets to provide liquidity, transparent
pricing, and allow payments to be made and reserves to be held in the yuan," a
forex analyst with a large joint-stock bank who did not want to be identified
told MNI. "The stock has been falling over the past two years because of the
PBOC's regulatory measures to stem capital outflows. That's drained yuan
liquidity, which has been a direct cause of the step backwards in
Unless China makes more of its currency is available overseas by running a
current account deficit rather than a surplus, there won't be enough yuan in
international circulation to allow it to be held in massive quantities, some
economists argue. But the country has been running surpluses for years and the
government may not be prepared to shift to running deficits.
"The central bank is concerned about running current account deficits and
also about completely opening up the capital account," the forex analyst said.
"So it would be very difficult to see the yuan becoming like the currencies of
developed western economies, at least in the next 10 years, although of course
that depends on the government's target. But I think the PBOC will be happy to
see some progress in the internationalization of the yuan."
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