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Globalization of the yuan picks up momentum
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The People’s Bank of China, in a report released last month, used the term “yuan internationalization” for the first time to describe its six years of efforts in promoting global use of the currency.
It was a sign that those efforts are coming of age and bearing positive results. The yuan today is the fifth-largest payment currency in the world, according to SWIFT data.
The central bank has so far signed currency swap deals with 32 countries and regions, and has appointed 16 banks across Asia, the Americas, Australia and Europe to act as clearing houses for the yuan.
The internationalization process began in 2009 when the central bank allowed cross-border trade settlements in yuan for the first time. It followed that by opening various quota-controlled channels for foreign capital to invest in domestic bond and stock markets.
In a report issued last month, the People’s Bank of China said it will launch a cross-border clearing mechanism called the China International Payment System this year. Though vaguely worded, the report suggested the bank will support foreign entities issuing yuan bonds onshore, will facilitate foreign institutions investing in the domestic interbank bond market, and will “study” the removal of quotas now placed on how much foreign central banks can invest in the interbank bond market.
The process of reform has been long and gradual as authorities try to balance the need for greater global engagement with concerns about shocks to long protected domestic sectors of the economy.
The Standard Chartered Bank has sketched a picture of how the transformation will play out in the near future.
“Within the next three years, China will achieve capital liberalization in a ‘managed’ way,” said Ding Shuang, China chief economist at StanChart. “By ‘managed.’ we mean well-grounded capital-account transactions will be free, and restrictions only on speculative short-term capital flows.”
He predicted few restrictions on foreign direct investment, equities investment and cross-border lending, but an overall quota on capital account transactions.
“Restrictions will be triggered only in cases of huge external impacts and crises to prevent excessive money flows,” Ding added.
StanChart said the volume of foreign trade settled in the yuan will rise to 50 percent in 2020 from 25 percent now. The value of yuan assets will be equal to between 4 percent and 5 percent of global central bank reserves by 2020, up from less than 1 percent now.
The value of domestic bonds held by foreign investors is expected to jump sixfold to about 5 trillion yuan (US$806 billion).
“Yuan internationalization has been faster than expected in the past five years, and it will be equally exciting in the next five years,” Ding said.
Amid this transformation, Shanghai is staking its future on becoming an international financial center by 2020.
To meet that goal, the city is set to play a bigger role in the deregulation of the yuan, with liberation policies and the creation of more mature financial infrastructure.
The mega China International Payment System, which will enable cross-border yuan clearing by both onshore and offshore participants with a common international coding system, is expected to be launched in Shanghai sometime in the third quarter. It has been years in preparation.
The system is expected to reduce the costs and time of processing cross-border payments. It will gradually replace clearing banks as a major mechanism for setting offshore yuan deposit rates and will provide a major channel for offshore yuan to flow back onshore.
“The internationalization of a local currency lifts the status and influence of a local financial center,” Zheng Yang, director of the Shanghai Financial Services Office, said, pointing to the relationship between the British pound and London and the US dollar and New York. “We will work with the People’s Bank of China to improve the yuan cross-border payment system.”
The first phase, to be launched later this year, will mainly offer one-on-one transaction settlement, mostly to serve cross-border trade and foreign direct investment.
The second phase, with an unspecified start date, will use a mixed settlement system that is more liquidity efficient.
Shanghai’s cross-border yuan transaction market totaled 1.01 trillion yuan in the first five months of this year, the largest among any Chinese city or province.
Fan Yifei, deputy governor of the People’s Bank of China, said central monetary authorities will support Shanghai’s financial reform process by allowing offshore yuan holders to make domestic equity investments, by piloting offshore yuan lending for multinationals, by opening up foreign currency payment for third-party payment agencies, and by supporting money market fund companies offering yuan-foreign exchange options.
The central government is also about to release a set of new deregulation rules for financial markets to support the interface between the China (Shanghai) Pilot Free Trade Zone and the city’s transformation into an international financial center.
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