Forex Comment Feb 26

Candid thoughts as yuan becomes world’s fifth global currency 

Tencent notes that more widespread use of the RMB/yuan also has downside impacts; As the value of a currency increases, that often means such countries end up with more imports, but it also has a negative effect on local labour and causes greater unemployment

Candid thoughts as yuan becomes world’s fifth global currency 
File photo: Reuters.

(ATF) Currently, the yuan still accounts for a low proportion of financial transactions around the world. The latest report of the International Monetary Fund put global foreign exchange reserves at $12.25 trillion as of the third quarter of 2020. Yuan reserves totalled $244 billion, which made it the fifth largest global currency. The top four currencies were the US dollar (nearly $7 trillion in total), plus lesser amounts in euro, Japanese yen and British pounds – all of the latter at least double the total in yuan.

The renminbi or RMB accounts for 1.99% of global foreign exchange reserves, basically 2%. And although its proportion is relatively low, it has become the fifth top international currency, according to Tencent, indicating that China's economic development and national credit has been recognized by the international community.

China's economic development has led to greater internationalisation of the yuan.

For a long time, the US dollar and euro were the major international currencies, accounting for about 76% of global business. But no major currency has predominated in Asia, now one of the major regions of economic development. Although foreign exchange reserves of the yen are larger than China’s, Japan’s economy has been in a long-term downturn, while China’s economy continues to grow strongly and its global interaction continues to deepen. So, the renminbi/yuan has the basic features to become a major international currency, Tencent stated in a recent commentary.

“But we must also be soberly aware that the above goals will take a long time to be gradually achieved. We should learn from the failure of the yen to become a major international currency, and adhere to the principle of systematic thinking and gradual progress,” Tencent wrote.

It gave advice on how the Chinese currency could achieve greater usage around the world.

"First, promote yuan pricing and cross-border settlement; give priority to the development of neighbouring countries and countries along the 'Belt and Road'. And promote use of the yuan as a payment method in international trade to improve the stability and convenience of using yuan.

"Secondly, ensure the yuan’s abundant liquidity encourages other countries to use renminbi for payment. Thirdly, enhance the country’s credit, attracting other countries to use the renminbi as a foreign exchange reserve currency, and improve the ability of the yuan to maintain and increase the value of the renminbi. Fourth, gradually open the capital market and increase the breadth and depth of capital market operations, while exporting treasury bonds and company bonds, and deepening the currency function of investment and financing."

At present, good results have been achieved in the above-mentioned aspects, Tencent said, noting that this had given greater vitality to internationalisation of the yuan.

In 2019, the amount of cross-border RMB/yuan settlement between China and neighbouring countries rose to 3.6 trillion yuan, an increase of 18.5% year-on-year. Since 2008, China has signed bilateral local currency settlement agreements with nine neighbour states, including Russia and countries along the 'Belt and Road Initiative'.

The central banks of South Korea, Singapore and other countries had included the renminbi in their foreign exchange reserves, while the world’s three major international mainstream indexes – Bloomberg Barclays Index, JP Morgan Chase Global Emerging Market Diversified Bond Index, and FTSE World Treasury Bond Index – all included China’s A-shares, which shows that international markets recognise China's position in the global marketplace, while recent reforms had opened up China's bond market.

It also gave an objective view of the disadvantages of the yuan being an international currency.

"The basic logical relationship is, in the process of becoming a freely convertible international currency, the renminbi [yuan] will inevitably appreciate gradually, which will affect the traditional labour-intensive industries to lose price competitiveness in the international market.

"For development, it will inevitably be transferred to other cheap labour." That meant development of the country had caused a decrease in domestic employment opportunities and an increase in unemployment.

"More importantly, the appreciation of the yuan has led to a decrease in exports and an increase in imports. The overall trade account has gradually turned from a surplus to a deficit – just like the current four countries [listed as major world currencies] – the United States, the European Union, the United Kingdom and Japan. Like the trade deficit, this is an inevitable process when one becomes an international currency," Tencent wrote.

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