China is on a drive to expand the use of the yuan internationally. But Beijing’s near-term intent is more about sanctions protection than currency dominance, according to a researcher.
“China’s strategies to develop an alternative financial system are defensive rather than offensive — at least for now,” wrote Zoe Liu, a fellow for China Studies at the Council on Foreign Relations, on Wednesday.
Beijing’s goal now is to minimize any impact from potential sweeping sanctions from the West in “extreme geopolitical scenarios,” such as a military conflict over Taiwan, which China claims as its territory, wrote Liu. Her post was published on the website of the Official Monetary and Financial Institutions Forum, a London-based think tank.
“Expanding the use of the renminbi in trade is less challenging than increasing its status as an international reserve currency,” Liu wrote.
Countries around the world have been diversifying their assets and chipping away at the dominance of the US dollar over fears that — like Russia — they could be shut out of the greenback-based world financial system should sanctions hit.
However, king dollar is so entrenched in the world’s financial system that few really think it can be dethroned.
The yuan faces challenges in its globalization
While the US and China’s strategic competition points to a possible race for currency supremacy, the Chinese yuan is far from ready — and even Beijing knows that.
An often-cited hurdle to the yuan’s internationalization is China’s use of capital controls to maintain financial stability. This means Beijing has control over how much foreign money can move in and out of China’s economy, which in turn influences the foreign currency exchange rate.
However, capital controls are not necessarily a dealbreaker for the broader adoption of the yuan in trade, wrote Liu.
This is because China is already a top trading partner for over 120 countries. Furthermore, Chinese authorities are willing to facilitate exports by offering currency swaps and providing trade finance, Liu added.
However, the yuan’s path to becoming an international reserve currency is fraught with obstacles because of other factors. They include the lack of risk-free yuan-denominated assets, the relatively closed nature of the Chinese financial market, and Chinese leader Xi Jinping’s preference for one-man rule over the rule of law, Liu wrote.
Businesses have reservations about using the yuan
Recent data from China’s central bank showed even Chinese businesses aren’t that sold on the yuan, as they hold back on converting their foreign-exchange earnings into the Chinese currency.
This appears to be primarily due to the yuan’s current weakness. It also shows it’s not so easy to displace the mighty US dollar as the world’s top reserve and trading currency of choice.
A recent global survey of 1,660 enterprises showed that there is just not enough interest in using the yuan to trade.
Conducted in March by China’s Bank of Communications and Renmin University, about three-quarters of the survey’s respondents were located in East Asia. Another one-fifth of respondents were from Southeast and Central Asia.
Half of the companies surveyed said the main stumbling block to wider use of the yuan was simply because their trading partners were not willing to use the currency.
About 64% of all respondents cited the “complexity of policies” as the main obstacle, while more than 40% of them cited other difficulties including barriers to capital flow.
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