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October 13, 2014

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Home » Business » Finance Special

Track toward global yuan continues undeterred

By Feng Jianmin | October 13, 2014, Monday | Print Edition

WHILE China is struggling to stabilize and rebalance its economy, it is sparing no effort in its long drive to make its currency more global.

In the past four months, the yuan has resumed a steady appreciation despite the nation’s somewhat murky economic outlook. That has supported the long-held belief that the central bank will not allow any significant currency depreciation to derail internationalization.

It also reinforces the perception that the People’s Bank of China is willing to allow greater volatility in the yuan as it steps up measures to encourage cross-border use and trade of the currency. Volatility is a hallmark of any freely traded currency.

At a conference organized by the London Stock Exchange in Beijing last Thursday, central bank official Wang Dan said China is looking at allowing individuals to directly invest in overseas capital and real estate markets.

The new thrust under consideration is called the Qualified Domestic Retail Investor, or QDRI, program. It would allow Chinese people to trade stocks on foreign bourses and hold other offshore assets, Wang said. He also said monetary authorities are in talks with London and Singapore to expand the existing Renminbi Qualified Domestic Institutional Investors, or RQDII, program to allow domestic institutions to invest abroad directly with the Chinese currency.

Currently, only about 100 domestic institutions are allowed to invest abroad under that program, with a combined quota of US$76.8 billion.

In due course, China will also allow domestic companies to issue yuan-denominated stocks offshore, Wang said.

The comments come just ahead of the start of a new program linking the Shanghai and Hong Kong stock exchanges, giving investors in both markets opportunities to access the other.

Economists cite these developments as positive signs that the People’s Bank of China intends to further deregulate the capital account by easing the barriers for outbound investment.

The move, in turn, may amplify volatility in the Chinese currency, which has seen unprecedented ups and downs this year.

“China is planning another step in capital account opening, this time for outflows,” Dariusz Kowalczyk, Hong Kong-based strategist at Credit Agricole CIB, wrote in a note. “This will limit upside for the yuan ... though we are bullish on the offshore yuan in the medium term.”

The Chinese currency began the year at a strong 6.05 to the US dollar before dropping to about 6.25 early in June as the central bank tried to put the squeeze on speculators betting on a continuation of the currency’s almost uninterrupted appreciation in recent years.

The currency’s weakness caused wide fluctuations in monthly foreign-exchanges flow in and out of the banking system between May and September, in a range involving 100 billion yuan (US$16.28 billion).

Currently, the yuan has returned to its February level of about 6.14 yuan to the dollar, a nearly 2 percent appreciation from early June.

“The yuan has outperformed all other emerging and major currencies over the past month,” Kowalczyk said, adding that he expects the exchange rate to gradually climb to 6 yuan against the US dollar in coming months.

Globalization of the yuan

Investors seem to read the situation as the central bank stepping away from intensive market intervention, giving the yuan a more bullish environment. That is attributed to China’s massive trade surplus, its foreign investment inflows and the continuing campaign to internationalize the currency.

Indeed, despite the recent volatility, the process of making the yuan more global has experienced no serious hiccups.

The latest data from SWIFT, a global transactions body, shows yuan payments worldwide have nearly tripled in value in the two years ending in August, with more than a third of financial institutions around the world using the Chinese currency for payments to the mainland and Hong Kong.

Overall, the yuan strengthened its position to rank seventh in the world among payment currencies, accounting for 1.64 percent of global payments in the month. That was a 1.57 percent increase from July, the SWIFT report showed.

The rising status in the global payments system came with an expanding yuan-clearing network.

Within the first seven months this year, new yuan clearing banks were approved for Frankfurt, London, Paris, Luxembourg and Seoul to facilitate access to yuan liquidity in those financial hubs. A quota of 1 billion yuan was granted for financial institutions in those markets to invest in China’s domestic securities markets.

At the one-year anniversary of Shanghai’s Free Trade Zone last month, an international gold exchange was opened, allowing foreign and domestic investors to trade gold and derivatives in the Chinese currency.

Another major breakthrough in the yuan’s internationalization came last Thursday when the UK government decided to make the Chinese yuan one of that country’s reserve currencies.

With the assistance of the Bank of China, HSBC and Standard Chartered Bank, London officials said they have begun a process leading to the issuance of the world’s first non-Chinese sovereign bond denominated in yuan.

The proceeds of the bond will be used to diversify the nation’s reserves, now loaded with US dollars, euros, yen and Canadian dollars, according to a statement.

Officials from China’s Ministry of Finance and banks will be delivering an investor presentation in London today.

“This is a real milestone because the UK will be the world’s first non-Chinese sovereign to issue a yuan bond,” said Andrew Carmichael, partner at UK-based law firm Linklaters.

He said it is a signal that Britain is keen to bolster its position as the world’s leading center for foreign exchange trading and as a significant yuan hub, and it guarantees that export finance transactions can be provided in yuan.

Finance Special


 

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