Wider use of yuan would benefi t Central Asia
If Central Asian countries could open their markets to larger- scale Chinese banks, it would make it possible to promote the acceptance of the yuan more widely.
Opening up the Central Asian market for the yuan would not only benefi t China, but also Central Asian countries, in terms of their governments and people. In the international macroeconomic environment in the past decade, one of the biggest changes has been the increasing shortage of US dollar liquidity. If no suitable emerging international currency can be found as an alternative, liquidity in the global market will shrink, which will jeopardize economic development in many countries.
The US Federal Reserve has started a cycle of interest rate rises, with the latest rise coming this month. This will directly reduce the dollar supply and will strengthen the dollar, leading to a large amount of global capital fl ows back to the West, especially to the US market. It will also exacerbate the shortage of dollar liquidity in emerging markets. Western institutional investors typically consider emerging market investments as marginal investments, which can be regarded as a supplement when the combined yield rate of mainstream investment is not high. Therefore, emerging market portfolio investments are more sensitive to changes in international interest rates. Interest rate changes in Western countries may cause signifi cant changes in the direction of capital fl ows. If the rate increases, the portfolio investments in emerging markets will be aff ected. In the early 1990s, the rapid growth of emerging market portfolio investment was related to the low interest rates in Western countries at that time. In 1994, the US Federal Reserve raised interest rates, resulting in a backfl ow of portfolio investment from emerging markets. It also triggered the Mexican crisis at the end of that year. Currently, there is “three- pronged pressure” in the US, from interest rate rises, a shrinking balance sheet, and substantial tax cuts. This will lead to greater capital fl ows back to the US and more pressure on dollar supply.
At the same time, because this will lead to depreciation for numerous currencies in emerging markets, local residents and enterprises will be less willing to hold domestic currencies and will want to get as much other foreign currency as possible. This “currency substitution” will be another factor squeezing dollar liquidity.
Under these circumstances, the best option is to promote local currency in international trade and investment to mitigate the shortage of dollar liquidity. Among the emerging international currencies, the yuan has become an important choice, thanks to the stability of its exchange rate. At the same time, the yuan can off er new options for asset preservation for countries worrying about the slump in their domestic currencies, some of which are located in Central Asia. Even in Kazakhstan, whose economy and per capita GDP rank the highest in Central Asia, the depreciation of the local currency, the Tenge, has been drastic. Two or three years ago, the Tenge’s exchange rate against the US dollar was about 30, but then it depreciated to 400 and is currently around 300. Hence, Kazakhstan has seen widespread currency substitution. The shortage of dollar liquidity has obviously infl uenced its economic and trade cooperation with China and with other Central Asian countries. Now that the European Central Bank has invested 500 million euros ($ 558 million) of its foreign reserves in yuan- denominated assets, greater use of the yuan would defi nitely benefi t other emerging markets in Central Asia.
China has made great eff orts to promote the internationalization of the yuan. At the Belt and Road Forum this year, China announced that 100 billion yuan ($ 14.6 billion) would be invested in the Silk Road Fund. In addition, the China Development Bank and Export- Import Bank of China will set up special lending schemes worth the equivalent of 250 billion yuan and 130 billion yuan, respectively, to support Belt and Road cooperation. However, in trade between China, Kazakhstan and other Central Asian countries, use of the yuan is still limited. The yuan is less accepted in the Central Asian market than the Russian ruble, even though the ruble has been far less stable than the yuan. The reason for this is that the banks undertaking the deposits and liquidation of the yuan in these countries are mostly subsidiary banks with limited capital, and these banks are not capable of large- scale yuan transactions. If these countries could open their markets to larger- scale Chinese banks, it would make it possible to promote the acceptance of the yuan more widely. Expanding use of the yuan will create a win- win situation for China, Central Asia and other emerging market economies.