Moving Up in the World

The signs are good for the internationalization of the Chinese yuan, but the road ahead is long By Deng Yaqing

After continuous appreciation in 2017, China’s currency, the yuan, has maintained this trend into the new year, boding well for its long-term target of internationalization.

According to statistics from China’s State Administration of Foreign Exchange, in January 2018 the yuan witnessed its central parity rate gain 3.1 percent against the U.S. dollar—more than half the 5.81 percent increase seen across the whole of 2017, which itself marked the most drastic annual appreciation seen in the past nine years.

“The weakening of the U.S. dollar and Chinese authorities’ reinforcement of supervision over capital outflow, such as overseas mergers and acquisitions, are two causes behind the strengthening of the yuan, but a robust Chinese economy is the major driving force,” Xu Hongcai, Deputy Chief Economist of the China Center for International Economic Exchanges, told Beijing Review. China’s economy expanded 6.9 percent last year, well above the government’s annual target of around 6.5 percent, marking the first pickup in pace in seven years.

“As China’s economy continues to move forward, the yuan’s internationalization will be achieved, but it will be a long, slow and uneven process,” Sun Jie, a research fellow with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, told Beijing Review.

A reserve currency

“In 2017, steady progress was made in the yuan’s internationalization, which can be summarized as a return to growth, more solid foundations, enhanced convenience and brighter prospects,” said Zhang Qingsong, Vice President of the Bank of China, at a press conference on the bank’s report on the yuan’s internationalization held on January 31.

“The yuan has become the seventh larg- est reserve currency in the world, and more than 60 countries and regions now include the currency in their foreign exchange reserves, the total amount equivalent to over $100 billion,” Zhang said, noting that from the perspective of global portfolio optimization, the market demand for yuandenominated assets looks set to skyrocket in the future.

In June 2017, the European Central Bank announced the exchange of 500 million euros’ worth of U.S. dollar reserves into yuan securities. In January, the Bundesbank, Germany’s central bank, also decided to hold some currency reserves in the yuan as part of its long-term strategy.

“The presence of the yuan in foreign exchange reserves is real but unimpressive. Actually, the figure has been on the decline due to stricter capital control,” said Xu.

According to data released by the IMF at the end of September 2017, for the first three quarters of last year the yuan accounted for 1.12 percent of foreign exchange reserves worldwide, compared with 63.5 percent registered by the U.S. dollar.

Zhang also said that the yuan’s international status lags behind the global status of the Chinese economy.

“China’s GDP makes up more than 15 percent of the world total, while its foreign trade and international investment contribute more than 11 percent combined. Therefore, there is huge potential for the yuan’s internationalization,” said Zhang.

Crossborder use

In order to facilitate mutual exchange, the Chinese Government has launched a series of policies to boost the convenience of cross-border yuan use. Macro-prudential management policies have been unveiled to lubricate cross-border financing, making it more convenient for domestic institutions to borrow offshore funds and clarifying the business procedures of overseas institutions entering the domestic bond market.

Since the end of 2017, over 250,000 enterprises and 245 banks have been engaged in cross-border yuan transactions, while 195 countries and regions have conducted cross-