Yuan goes global

[TaiShang]

Yuan goes global
Global Times

Experts weigh in on benefits, challenges of yuan internationalization

Inking offshore yuan clearing agreements and setting up overseas yuan clearing centers seem to be at the top of the agenda of recent overseas trips by top Chinese leaders. Meanwhile, the latest salvos in a race for yuan trading centers among major overseas financial hubs mirror the fast-growing popularity of the Chinese currency. Is this a good time for China to make bold strides in internationalizing its currency? What would be the benefits and risks? The Global Times interviewed scholars and economists to unveil the answer.

Lu Zhengwei-Chief economist at Industrial Bank

Lu Zhengwei

The major driver for China's internationalizing its currency is to get the yuan into the Special Drawing Right (SDR), a basket of currencies composed of the US dollar, euro, yen and sterling, a form of reserve asset used by the IMF and member governments.

According to the IMF's criteria, a SDR currency should be widely used for international transactions and in foreign exchange reserves before joining the basket.

Though use of SDR-denominated assets remains low globally and membership in the basket has little practical effect, including the yuan in the basket would symbolize recognition of a bigger international role for the Chinese currency.

The valuation of the SDR basket is reviewed and adjusted every five years, with the nearest review taking place in 2015.

The IMF did not include the yuan in its SDR basket currencies in the 2010 review as it was unable to meet the IMF's criteria, despite market demand for adding it to balance the US dollar.

Some may say China's recent efforts to internationalize its currency is to challenge the dominance of the US dollar, but the status of the yuan is far from posing a challenge, given that even the euro is not strong enough to match the prevalence of the dollar.

An artificially boosted yuan in the international market does no good to China's economy. Under the current circumstances where the manufacturing sector is not very profitable, an internationalized yuan will lead to its appreciation as demand for the currency increases, further resulting in currency arbitrage, weigh on exports, and eventually drag down the economy.

Whether a nation's currency can be an international one depends on its economic strength, not the result of artificial effort.

Li Youhuan, Senior economist at the Guangdong Academy of Social Sciences

Li Youhuan

A nation's economic strength is symbolized by the international influence of its currency. Accelerating the internationalization of the yuan is an important way to strengthen the global influence and competitiveness of China, and to challenge the monopoly status of the US dollar in the international financial system.

The largest obstacle to accelerating yuan internationalization is resistance from China's largest competitor, the US, as a rising yuan threatens its dollar dominance, as well as resistance from other major economies whose currencies are already major international currencies.

Free currency exchange and the establishment of clearing centers are important steps in pushing for internationalization of the Chinese currency. The enthusiasm of the major European financial hubs toward yuan trading shows that they are well aware that global use of the yuan is a future trend, helping to boost the finance and economy in their nations.

We have seen financial hubs including London, Frankfurt, Paris and Luxembourg vie to set up offshore yuan clearing centers.

The yuan's global popularity is related to whether it is convertible under China's capital account. Existing control and partial inconvertibility in the capital account restricts the free movement of currency.

Many Chinese financial institutions are not well prepared for the settlement of the yuan and foreign currencies and free convertibility of the yuan.

Under these circumstances, existing current controls on the capital account serve as a fire wall to cut off the instant transmission of financial risks in the international market.

China is expected to gradually relax control when the time is right.

Liu Ligang, Chief China economist at ANZ Banking Group

Liu Ligang
Successful yuan internationalization depends on global acceptance, the financial infrastructure including a sound clearing system, sophisticated domestic financial institutions and a fully convertible yuan under China's capital account.

The progress of internationalization is subject to domestic financial reform, market opening-up and relaxation of capital control. It would be hard to promote the global use of the yuan without a fully open capital account.

The criteria for successful yuan internationalization is that the yuan takes at least half of the trade settlement value, yuan-denominated assets can flow out of China freely, and a totally market-driven exchange rate regime is set up.

Currently the yuan's share in trade settlement currencies is estimated to be less than 20 percent globally. This is expected to rise to more than 30 percent by 2025.

If trade payments are made in yuan, it will greatly reduce the foreign exchange risks for Chinese importers and exporters, compared to when they use the US dollar. Similarly, if the yuan becomes an international financing currency, Chinese firms do not have to borrow US dollars and suffer foreign exchange losses in case of exchange rate fluctuations.

Once the yuan becomes a reserve currency for other economies, China's macroeconomic policies will influence the world economy.

The obstacles to yuan internationalization come from financial reforms including the interest rate liberalization that were only half done and the limited size of China's capital market. As such, if internationalization is pushed too far, and the capital account is opened indiscreetly, hot money will flow in to pursue higher rates in China, which will further inflate property prices.

Meanwhile, if the yuan is depreciating against other currencies, capital will flow out of China, leading to a financial crisis.

Lian Ping, Chief China economist at Bank of Communications

Lian Ping

Given China's gradual opening-up of its currency account by 2020, a market-driven exchange rate regime reform, its status as the world's second-largest economy as well as its top position in trade, the yuan will inevitably be one of the major international currencies in the long run.

Internationalization should be done in a natural way that matches real demand for the yuan.

Risks may exist in the process of yuan flowing back to China. As the offshore yuan does not react to the domestic macroeconomic policies, this will lead to a mismatch between the onshore and offshore yuan pricing. The exchange rate of offshore yuan will influence that of onshore yuan, putting pressure on the onshore economic policies.

 

[Jlaw]

It's a double edged sword for global acceptance of Yuan. China's manufacturing is not close to peaking yet and we do not want to destroy our iron bowl. We understand the importance of making the USD less relevant, but I do not like this idea. They should wait at less 5-10 years down the road.

 

[Zhukov]

Hmmm Now Thats Interesting a currency in the International Trade backed by an authoritative Government and a Reletively Controlled Economy.
Will they opt for an open market floating exchange rate system? What impact will it have on the so far "One Way" Chinese Economy.
Will US Germany and Japan will let it happen?
This is a huge pandora box that will have massive effect on World Economy.

 

[Edison Chen]

Hmmm Now Thats Interesting a currency in the International Trade backed by an authoritative Government and a Reletively Controlled Economy.
Will they opt for an open market floating exchange rate system? What impact will it have on the so far "One Way" Chinese Economy.
Will US Germany and Japan will let it happen?
This is a huge pandora box that will have massive effect on World Economy.

The yuan to USD exchange rate is more flexible now, China's loosing the control of floating range of exchange rate, in 1994, it's 0.3%, 0.5% in 2007, 1% in 2012, 2% in 2014.

 

[Zhukov]

The yuan to USD exchange rate is more flexible now, China's loosing the control of floating range of exchange rate, in 1994, it's 0.3%, 0.5% in 2007, 1% in 2012, 2% in 2014.

But bro is it wise to expose Yuan to International Arena when china is already growing with Approx 7% plus? I understand the Strategic and Financial Benefits China and its Allies will get from this. But is it worth the risk? It can very well backfire in case of another 2007 Crash like situation occur?

 

[somsak]

It will fail. Only Gold and Silver or Oil is true money.
I mean... The true money is the money from God(Im Bhuddist Why do I say God?). Which is some kind of chemical elements or objects. Human created money is just contact between people. Betrayal is human nature. Therefore, it will fail.

 

[Edison Chen]

But bro is it wise to expose Yuan to International Arena when china is already growing with Approx 7% plus? I understand the Strategic and Financial Benefits China and its Allies will get from this. But is it worth the risk? It can very well backfire in case of another 2007 Crash like situation occur?

Yes, true, I am also against a sudden loose of financial control, it will be a disaster. That's why China is slowly moving on. China worries that in recent years, position for Forex Purchase increases the endogenous money supply, which affects the stability of price level.

 

[Genesis]

Yes, true, I am also against a sudden loose of financial control, it will be a disaster. That's why China is slowly moving on. China worries that in recent years, position for Forex Purchase increases the endogenous money supply, which affects the stability of price level.

When there is a problem you face it. We are trying to be a world player and a economic powerhouse. You don't think it will be easy and without risk did you?

Established people will try to stop us, weak will try to use us, rivals will try to sabotage us. There's a million things that could go wrong and probably will. But we must move forward all the same, we have a leadership that may not be the most ethical or even uncorrupted, but they were picked for their ability to compromise, to take risks, to win battles, and to destroy all that stands in their way.


But there is a silver lining, we are still a ~95% educated population, a massive one at that, The world's largest post secondary educated work force, a developed infrastructure that is still expanding in all directions, and a tech and finance sector that is well developed, a military that is well equipped and trained as well as a MIC that is second to only the US and maybe Russia.

Even if the sky falls, we are still a nation in far better position to reassert ourselves than anyone else.

 

[Zhukov]

Best of Luck from Allies

 

[xunzi]

It's a double edged sword for global acceptance of Yuan. China's manufacturing is not close to peaking yet and we do not want to destroy our iron bowl. We understand the importance of making the USD less relevant, but I do not like this idea. They should wait at less 5-10 years down the road.

Time is running out. We needs to strengthen the yuan because of a shift to domestic consumption model now. Yuan needs to be a globalized currency. There will be challenge but we will accept the challenge and conquer it.

 

[Aepsilons]

It will fail. Only Gold and Silver or Oil is true money.
I mean... The true money is the money from God(Im Bhuddist Why do I say God?). Which is some kind of chemical elements or objects. Human created money is just contact between people. Betrayal is human nature. Therefore, it will fail.

Always so very spiritual in your posts, Kun @somsak. Nit noi, nit noi.

 

[somsak]

Always so very spiritual in your posts, Kun @somsak. Nit noi, nit noi.

Vow you know some Thai words.

Gold is real money. The US Dollar money we are using can be printed at will. Once new money is printed, it reduce the purchasing power of those who do saving. When I first learn about Quantitative Easing, and Thai Financial Crisis. I learn that Fed can print money for free. My commonsense think that this is a cheating, like game cheating. My commonsense tell me that the purchasing power is drained out by newly created money. The loss of purchasing power can be seen as "Inflation". Therefore, everything should be traded as a god provided money: the gold standard.

During the 18 century, the money used in Asia was silver. Therefore in Thai, we say "silver" for the word "money". The measurement of price of everything is done against the weight of silver. Weights are a god's attribute of all objects in the Universe. This is correct. This is true money.
Later the world switch to gold standard. Still it is the true money. Money where man cannot created. Money created in the universe through the very same process the sun was created. Therefore it is god's money.

Pick up one of US dollar note. You can see the word "In god we trust". For me I would rather put an "l" there so that it become "In gold we trust".

For Yuan to go global successfully, the key point is therefore to use god's money. To declare Yuan-gold convertible at fix price.

 

[Audio]

Money created in the universe through the very same process the sun was created

Actually, you're wrong.

Gold is created at the last miliseconds before star explodes. That's why it's so rare, and so valuable, even though it's not useful (industrial use) for a lot of things.

 

[somsak]

Actually, you're wrong.

Gold is created at the last miliseconds before star explodes. That's why it's so rare, and so valuable, even though it's not useful (industrial use) for a lot of things.

Yeah. I admit that current Science believe so. Yet Science is not constant, it will change when future evidence has stronger weights.

But you get the idea about god money, the main idea in last post.

 

[Jlaw]

Vow you know some Thai words.

Gold is real money. The US Dollar money we are using can be printed at will. Once new money is printed, it reduce the purchasing power of those who do saving. When I first learn about Quantitative Easing, and Thai Financial Crisis. I learn that Fed can print money for free. My commonsense think that this is a cheating, like game cheating. My commonsense tell me that the purchasing power is drained out by newly created money. The loss of purchasing power can be seen as "Inflation". Therefore, everything should be traded as a god provided money: the gold standard.

During the 18 century, the money used in Asia was silver. Therefore in Thai, we say "silver" for the word "money". The measurement of price of everything is done against the weight of silver. Weights are a god's attribute of all objects in the Universe. This is correct. This is true money.
Later the world switch to gold standard. Still it is the true money. Money where man cannot created. Money created in the universe through the very same process the sun was created. Therefore it is god's money.

Pick up one of US dollar note. You can see the word "In god we trust". For me I would rather put an "l" there so that it become "In gold we trust".

For Yuan to go global successfully, the key point is therefore to use god's money. To declare Yuan-gold convertible at fix price.

Money is man made way to put value on something for goods and services. Virtually anything can be used as a currency depending on who is the next superpower. Who is to say the next superpower will use gold or silver as currency?