Yuan liberalization runs in the fast lane as the currency becomes attractive for trade
The liberalization of the yuan, China’s currency, is accelerating despite the trade war with the US, and it won’t be too long for the currency to become fully convertible on the market as the world’s second largest economy keeps expanding and its capital markets are incrementally opened to foreign investors.
Zhou Xiaochuan, former chief of the People’s Bank of China, China’s central bank, said at a finance forum in Beijing on Friday that there was not a choreographed roadmap for the yuan’s internationalization orignially. With the rapid growth of the economy, the attraction of the currency has grown too.
Many people in and outside China are predicting when the day will arrive for the completely free exchange of the yuan with the world’s major currencies. That day won’t be too far away and it will most likely come within 10 y=ears.
In early September, China’s central government eliminated previous quota curbs on QFII and DQFII, two prime investment avenues for foreign funds to buy Chinese equities, which is widely considered a courageous step to make China’s economy closely intertwined with the global system.
And, the fourth plenary session of the 19th Communist Party of China Central Committee a week ago made the decision to build a modern central bank operational regime, in addition to speeding up the construction of free trade zones and free trade ports – which leads a crowd of Chinese market watchers to predict a trial run of a free yuan exchange in the foreseeable future in South China’s Hainan Province, the country’s largest free trade port.
The appeal of the yuan is elevating. The central bank said cross-border usage of the yuan has exceeded 14 trillion yuan ($2 trillion) from January to September this year, increasing more than 20 percent year-on-year. Foreign holdings of Chinese equities, including assets of bonds and stocks, have reached a record high.
On Friday, global index provider MSCI moved to quadruple the weighing of Chinese mainland stocks in its global benchmarks, increasing the inclusion factor of Chinese large-cap stocks to 20 percent from just 5 percent at the beginning of the year. Now 572 listed Chinese companies are included, and MSCI said it will consider taking China’s technology-studded STAR shares into its benchmarks.
The move is significant and could bring $80-$100 billion foreign investment to China’s A-share market. And, rival index publishers including FTSE Russel and S&P Dow Jones Indices also started adding the yuan-denominated Chinese shares to their global benchmarks in 2019, displaying global investors’ confidence in China’s capital market and sustainability of the economy.
As a result, the yuan is in rising demand in the offshore market, and the trend will set the bedrock for the currency’s firm value and its irreversible presence on the international stage. A report from the International Monetary Fund (IMF) said that more than 60 central banks or monetary authorities now include China’s yuan into their forex reserves. And, in the first nine months of this year, their yuan foreign exchange reserve assets have surpassed 2 trillion yuan. Global market analysts credit the rise of yuan transactions as a genuine recognition of China’s financial stability.
At the same time, the number of global banks that accept yuan payments rose 11 percent to more than 2,200 in September, and the volume of trade conducted in yuan hit 2.2 percent, making China’s yuan the world’s fifth-most active currency for trade, just behind the US dollar, the euro, the yen and the pound.
Despite the relentless tariffs war the US government forced on the world’s second largest economy, China’s leadership does not waver. Scoffing at Washington’s protectionism and unilateralism, Beijing is forging ever closer economic relations with other major economies. It has stuck to the iconic Belt and Road Initiative by investing more resources and has championed more inclusive free trade advances like the high-profile RCEP.
These measures will ramp up market confidence and expectations for further gains of the yuan. It won’t be too long for the currency to become freely convertible, as the country keeps developing the most advanced technologies, upgrades its industrial structure, builds up its middle class and domestic consumption power, and phases in a strong capital market.