Weak dollar and not freely convertible Yuan may help Chinese to influence exchange rates – Russian expert

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The Chinese yuan (CNY) is a non-convertible currency and the Chinese authorities are not interested in making it a fully freely convertible currency. So, the share of the yuan in international settlements is unlikely to grow rapidly, says an analyst Yevgeny Mironyuk from a Russian financial services company Freedom Finance. Yuan is a more popular name of the Chinese currency which is officially called Renminbi (RMB).

Speaking to a Russian news source Prime, Yevgeny Mironyuk said “Chinese politicians are still satisfied with the yuan exchange rate, it does not prevent exports from growing at double-digit rates. At the end of June 2021, exports grew by 20.2 percent year-on-year, and the trade surplus reached 51.1 billion in dollar terms.”

As per him, the lack of the ability to freely convert the yuan gives the People’s Bank of China more freedom of action in determining the parameters of monetary policy.

Contrary to the experts opinion, some other experts feel that in the long term, the Chinese authorities can completely liberalize the currency. In 2015, the Board of Directors of the International Monetary Fund (IMF) decided to include the Chinese yuan in the calculation of the Special Drawing Rights (SDR) basket. Central banks of developing countries can buy yuan in their reserves and receive bilateral loans in yuan from China.

“But international lenders are negative about China’s foreign exchange intervention and policy of ‘soft’ currency dumping. This is bad for demand for the yuan. The country’s stock market remains largely closed to foreign investors and highly regulated. Until these barriers are lifted, confidence in the yuan will remain lower than other reserve currencies, ” contends Yevgeny Mironyuk.

New currency for the world

There are 159 currencies around the world today, but not all of them are equally important. Only a few are used for international payments. Such currencies, which have already become international, are a kind of elite club, which is not easy for a beginner to get into. The yuan may become the third most important reserve currency by 2030 as per the specialists of the Goldman Sachs. The reason for the rise is the growth of foreign investment in Chinese stocks and bonds denominated in the Chinese currency.

Internationalization of the yuan is a long-debated goal of the Chinese leadership. In 2015, the renminbi joined the dollar, euro, yen and British pound sterling in the IMF’s basket of currencies, becoming the only non-convertible currency in it.

International currency is used for foreign economic transactions, for example, in trade settlements. Often, in order to pay off, the counterparty has to change its currency into dollars, and then convert them into yuan. Due to exchange rate fluctuations, this is more expensive than paying directly in Renminbi.

According to the international interbank system SWIFT (Society for Worldwide Interbank Financial Telecommunication), through which most international trade transactions pass, the renminbi accounts for only two percent of all cross-border payments. However, there is other data as well. The Chinese State Currency Exchange Administration says that the Renminbi’s share of cross-border payments has risen to 40% in recent years. And a 2020 report from the People’s Bank of China says that yuan-based trade grew from less than one percent in 2009 to more than 20 percent in 2019. The current strengths of yuan facilitates China’s trade with other countries and allows it to evade Western sanctions.

Be that as it may, when one compares the share of turnover in world trade with the share in world GDP, China still lags far behind other countries. Currencies used in the US, Canada, Britain and the EU account for 84% of world trade. At the same time, ten percent of the world’s population lives in these countries, and together they account for 35% of world GDP. The share of the PRC alone in world GDP is approximately 20%, and the country accounts for almost 18% of the world’s population.

China arrived at the world arena and developed its economy since the end of the last century. The main goal of the Chinese government was to provide a comfortable environment for its companies in the world market. Trading in RMB reduces the risks for them. However, along with the rapid growth of the PRC and its transformation into the second largest world economy, attitudes have also changed. Now the PRC needs to ensure its influence in international financial institutions.

The deteriorating relations with the United States convinced the leadership in Beijing of this even more, because the sanctions, which Washington has increasingly imposed in recent years, have become the main tool for deterring competitors precisely because the United States controls the global payment system.

Payment system independent of the dollar

China began preparing a payment system independent of the dollar a long time ago. The first pilot scheme appeared in 2009. It was attended by five cities in mainland China on the one hand and the special administrative regions of Hong Kong and Macau and the ASEAN countries on the other. This is how settlements in yuan became possible for the first time outside the PRC. Two years later, the program expanded to include the entire mainland China and the rest of the world.

In China’s 18 free trade zones, banks can directly pay for goods and services in RMB. In addition, the country’s leadership has launched several initiatives to expand the use of renminbi. In particular, since 2011, there has been a program called “Qualified Foreign Institutional Investor in RMB”, within its framework, foreign investors can directly invest in the stock and bond markets of mainland China. Investment channels have also emerged between the Shanghai and Hong Kong, Shenzhen and Hong Kong stock exchanges, through which investors can trade shares in another market using their local brokers.

Other mechanisms

China has signed currency swap agreements with 39 developing countries. This means that the central banks of these countries replenish their reserves with yuan, and the People’s Bank of China – with the currencies of partner countries.
Foreign exchange reserves are an important indicator of the internationalization of a currency. In 2019, of the foreign exchange reserves of countries around the world, which is approximately $ 11 trillion, about two percent accounted for the yuan. This is not much compared to the dollar – over 60% – and the euro – about 20%. However, when you consider that Renminbi’s rate was less than one percent in 2016, progress is obvious.

To a large extent, the internationalization of the yuan is facilitated by Chinese ‘One Belt, One Road’ initiative. Most of the payments between the participating countries go through the Chinese cross-border interbank payment system CIPS – an alternative to SWIFT. It began operations in 2015 and three years later processed payments worth about 26 trillion yuan – 80% more than a year earlier.

The electronic yuan in China has already appeared, in order to pay with such a currency, you do not need a bank account, which means that you can bypass the Western system.

Yet China does not plan to replace the dollar with the yuan and does not seek global financial domination. For this, it is necessary that the movement of capital in the Chinese currency be free, but the country’s leadership strictly controls it. Moreover, the priorities, and not only of the PRC, are to soften the blow of Western sanctions on the economy and to provide more convenient and cheaper trade settlements with foreign partners. And yet the internationalization of the yuan will in any case change the balance of financial and geopolitical power and may well undermine the dominance of Western countries.


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