A step further in the internationalization of the yuan

26 Feb



The Chicago Mercantile Exchange, the owner of the world’s biggest futures exchange, is set to launch deliverable offshore yuan futures in Hong Kong next week in a move which many analysts believe to signify another large step forward in the internationalization process of the currency, the unit of account for the Renminbi (CNY).

Price ranges of either $100,000 or $10,000 will be offered in the hope of attracting hedge funds and retail traders to invest in the currency, which currently sits 14th in the list of currencies used in all international payments compiled by SWIFT.

Recent years have seen a very-much outward approach taken by China in its approach to currency, often referred to as ‘financial liberalization’. Although it accounts for around 15% of the world’s money supply, the majority of China’s money was sealed within its borders until 2009. Since then, the government has allowed Chinese importers and exporters to settle their trades in yuan and many Chinese firms now make direct foreign investment with the currency. In addition to this, China has signed currency swaps with around 20 countries in order to increase its influence worldwide. In the last 3 months of 2012, trade of 900bn yuan ($145bn) was settled in the currency, accounting for 14% of China’s trade.

Nathan Chow, an economist at DBS Bank Ltd, said, “Market confidence in accepting Renminbi for trade settlement will increase. In turn, this will encourage more participation from corporations and banks, potentially increasing the range of Renminbi investment products.”

The yuan still has key advances to make if it is to compete with other currencies such as the dollar, pound and yen. Such currencies are used in the issuing of bonds and the holding of reserves and are pegged against by other counties due to their international authority and influence. In order for the yuan to contend as a true global force, many analysts argue that Chinese individuals must be allowed to invest and save abroad and outsiders must not be prohibited in their purchase of Chinese assets at will. Currently, this is at odds with the government’s capital and credit controls. It is these tight controls and restrictions that have helped China to avoid the worldwide recession and continue to maintain a high level of control over inflation. In addition, worries exist within the country that investors and depositors may seek financial institutions outside of China en masse should the controls be lifted at once.

It seems that the very restrictions that have ensured China has weathered the global financial storm in recent years will need to be relaxed if the yuan is to compete with other major currencies. It will be interesting to see whether the gradual loosening will be successful or if this proves to be a price too rich for the Chinese government.







One Response to “A step further in the internationalization of the yuan”

  1. db7g09 March 27, 2013 at 8:14 pm #

    The internationalization of the yuan is a major challenge facing the Chinese government. However, China has yet to give a firm answer on what should be the final goal of internationalization. Fortunately, yuan internationalization does not currently conflict with other possible options, such as, as Yun Chul Park argues the creation of a supra-sovereign currency or a regional currency. While China can benefit from the internationalization of the yuan, its possible negative effects on China’s financial stability may also be serious.

    The twists and turns of yuan internationalization in the past couple of years raises a very important question: does China want to take the risk of fully liberalizing its capital account without first putting its own house in order and giving the market force full play in determining the interest rates and exchange rates? The question facing China is not about the desirability of yuan internationalization. It is about the prioritization of the China’s financial reforms and regime changes. The question becomes even more acute when taking into consideration the fact that the global financial market is still in turmoil and the China’s financial markets are in a messy state. It is risky to pin the hope of the emergence of a healthier and more robust financial system on the creative destruction of external shocks, while the existing system is still too weak to withstand such shocks.

    The internationalization of the yuan requires convertibility and liberalization of the capital account. Due to the fragility of the financial system and its lack of attractive financial instruments, China’s liberalization of the capital account and hence the internationalization of the yuan must proceed in a gradual fashion.

    Yuan internationalization should be a natural course of economic development and capital account liberalization. To push yuan internationalization in an artificial way is counterproductive. Policies aimed at promoting yuan internationalization should not be based on yuan appreciation. Otherwise, internationalization will not be sustainable.

    China’s growing economy and trade volume are favourable conditions for internationalization. However, other conditions, such as the existence of deep and liquid financial markets, have not been met. To create conditions for the internationalization of the yuan, the Chinese government should encourage other financial markets to play an increasingly important role.

    Melissa Murphy asserts that “Without the initial realization of establishing market-determined interest rates and exchange rates, yuan internationalization could easily go astray.” The process of yuan internationalization essentially is a process of capital account liberalization. Due to the unprecedented and complex global financial crisis and the China’s huge imbalances, capital account liberalization should be pursued in a cautious way. China should first put its own house in order. Before the internationalization of the yuan can make progress, China must speed up the reform of its financial markets. Interest rates should be liberalized. At the same time, the yuan exchange rate should be allowed to float freely. Only when China’s financial reform makes an important breakthrough, can the internationalization of the yuan be able to make meaningful progress.



    Melissa Murphy, Is China Ready to Challenge the Dollar? (A Report of the Csis Freeman Chair in China Studies) (Center for Strategic and International Studies 2009) pp.10.

    Journal articles:

    Yung Chul Park, ‘RMB Internationalization and Its Implications for Financial and Monetary
    Cooperation in East Asia’ (2010) 18(2) China and World Economy 1–20, 2.


    Mamta Badkar – ‘China Is About To Take A HUGE Step Toward Internationalizing Its Currency’ – http://articles.businessinsider.com/2012-03-08/markets/31135084_1_renminbi-yuan-currency – 8 March 2012 (accessed 27 March 2013).

    Andrew Sheng – ‘The Yuan’s Place in History’ – http://english.caixin.com/2012-05-10/100388813.html – 5 October 2012 (accessed 27 March 2013).

    Wang Xiaotian – ‘Global use of yuan to see ‘major leap’ in 2013’ – http://usa.chinadaily.com.cn/business/2013-01/17/content_16130737.htm – 17 January 2013 (accessed 27 March 2013).

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