The People’s Currency
Freeing China's Yuan
China is an economic giant, but its money is still a bit of a runt. Unlike the U.S. dollar, euro and British pound, it’s little used away from home. The No. 1 exporter has kept its currency off world markets in the past and still restricts buying and selling. That's walled off China from boom-and-bust capital flows and kept its goods cheap. Now it has reason to loosen the grip on the renminbi, which means “the people’s currency,” and is better known by the name for its biggest unit, called yuan. To fuel a slowing economy, attract foreign capital and back rising political ambitions, China is promoting the use of the yuan throughout the world, a slow-moving process known as internationalization. It’s one of the biggest changes since the creation of the euro, a beckoning bonanza for bankers and traders — as well as a threat to China’s economic stability and credibility. Long accused of keeping its currency artificially weak, China is now doing whatever it takes to stop it falling.
U.S. President Donald Trump has branded China a “grand master” at currency manipulation, a nation that effectively taxes overseas goods by keeping the yuan undervalued. Yet since devaluing the yuan in a surprise move in August 2015, Chinese authorities have shifted their focus to stemming a slide in the currency. China has burned through $1 trillion, or one-quarter, of its foreign exchange reserves since mid-2014, as well as tightened rules on capital outflows. Private investors — both Chinese and non-Chinese — can legally move their money in and out of the mainland only through approved programs and in limited amounts. But companies and individuals have found ways to get their funds out, with favored methods ranging from buying insurance policies to overseas property. The slowing Chinese economy and a surging U.S. dollar also contributed to the currency's decline, with the offshore rate reaching its lowest level on record at the end of 2016. The yuan's fluctuations have continually tested a pledge by the government to give market forces a bigger role in determining the exchange rate. At the same time, the yuan's internationalization has a long way to go: China accounts for more than 10 percent of world trade, but only 2 percent of global payments are made in yuan. In recent moves to widen its use, President Xi Jinping pledged 100 billion yuan of funding for his “Belt and Road initiative.”
China has been reluctant to open its doors throughout history; a scornful 1793 letter from the emperor to King George III dismisses all requests to ease restrictions on British traders. The economy was closed to non-socialist countries under Mao Zedong for 30 years and then China started liberalizing at its own pace, an approach the late leader Deng Xiaoping called “crossing the river by feeling the stones.” In 1994, it set a fixed rate for the yuan against the U.S. dollar, a peg that endured for a decade. After China joined the World Trade Organization in 2001, selected foreign institutional investors were permitted to buy yuan-denominated stocks in limited amounts. The yuan’s peg was dropped in 2005 and then unofficially slapped back on in 2008 to insulate China from the global financial crisis. In 2010, China’s economy overtook Japan as the world’s second-largest and yuan use took off. In 2016, the yuan joined four other currencies in the International Monetary Fund's Special Drawing Rights, a kind of overdraft account it holds for global central banks. That was a milestone some analysts estimated could trigger a $1 trillion switch into Chinese assets. The country’s leaders have said they aim to make the yuan convertible by 2020. More than a dozen countries are vying to become yuan trading hubs and have signed emergency swap agreements. Inside China, the yuan can trade 2 percent on either side of a daily fixing set by the central bank; a freely traded offshore rate tracks it.
The U.S., which had scolded China on and off for decades for keeping the exchange rate weak to boost exports, stopped calling the yuan “significantly undervalued” and backed its bid for IMF reserve-currency status. Yet Trump revived the criticism and threatened to impose tariffs on imports from the country, while also going back on a campaign pledge to brand China a currency manipulator. The yuan’s advance into global markets demonstrates President Xi Jinping’s ambition to challenge the hegemony of the dollar and a global economic order dominated by the U.S. and Europe. Inclusion in the IMF's reserve-currency basket is expected to accelerate the pace of reform. A more widely used currency would raise China’s influence in setting prices of commodities from oil to iron ore and give individuals and companies on the mainland more choice with their savings. As the yuan makes the long march to convertibility, China becomes vulnerable to swings in the currency and money flows that could aggravate its economic slowdown.
The Reference Shelf
- Bloomberg primers on what it means for the yuan to be included in the IMF’s reserve basket and why it's joining.
- Bloomberg Q&As on China's capital controls, its arsenal of monetary policy tools and Trump's flip on branding China a currency manipulator.
- A Bloomberg infographic on the boost to China's currency from IMF inclusion.
- The Society for Worldwide Interbank Financial Telecommunication or SWIFT compiles statistics and reports on cross-border yuan flows.
- HSBC publishes surveys and trading guides to the yuan on its website.
- Euromoney magazine’s special report on the future of the yuan.
- The IMF’s tally of official foreign exchange reserves.
- QuickTakes on China’s economic reforms and managed markets.
- A timeline on the yuan's ascent to global reserve status.
First published April 24, 2016
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Robin Ganguly in Hong Kong at email@example.com
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