The Chinese government is making strategic moves to construct an Asia-based economic bloc based on the Chinese yuan, also known as the renminbi, with the ambition of turning it into a currency capable of replacing the dollar in the world economy. But China’s currency strategy under the one-party rule of the Communist Party may have a negative impact on the global community.
The Chinese yuan was added to currencies that constitute the special drawing rights of the International Monetary Fund on Oct 1.
Currently, dollars are overwhelmingly used for settlement in trade and cross-border investment, accounting for 42.5pc of settlements as of August this year.
Beijing is making strategic moves to construct an Asia-based economic bloc based on the yuan
The yuan ranks fifth, accounting for 1.86pc of payment volume, immediately behind the Japanese yen, which accounts for 3.37pc.
With the yuan now included in the basket of currencies making up the SDR, the currency’s payment volume share will likely increase. Major powers will build up foreign-currency reserves in yuan, and yuan-denominated financial instruments will begin to appear on world markets.
In short, it is expected that the yuan will eventually be widely used around the world.
The yuan’s inclusion in the SDR basket is simply one step in China’s aim for economic supremacy. The final ‘dream’ China has its sights set on is for the currency to replace the US dollar as the world’s key currency.
This dream started with the Lehman shock back in 2008, when the financial panic that began in the United States raced around the world in the blink of an eye.
It was China, at that juncture, which propped up the world economy through government expenditures amounting to 4tr yuan.
In April 2009, then President Hu Jintao called at the Group of 20 summit meeting for the assembled leaders to promote a multipolarisation and rationalisation of the international monetary system.
That powerful punch to the dollar system served as the starting gun for China to begin fulfilling its currency ambitions.
Acceleration under President Xi: Under President Xi Jinping, China’s move toward currency supremacy has picked up speed. To probe the Xi administration’s currency strategy, people refer to ‘Chinese Currency and the World,’ a book by Chen Yulu, the deputy governor of China’s central bank.
The book lays out a plan for internationalising the yuan, a project to be carried out in three 10-year stages.
The first is to have the yuan — by about 2020 — used in China’s trade with neighbouring countries. By about 2030, the range of the currency’s use should be expanded to Asia. Finally, by about 2040, the yuan should be the most important currency worldwide.
Two concrete policies aimed at bringing this about are the ‘One Belt, One Road’ initiative to create a land and maritime Silk Road, and China’s advance into the global financial arena. This advance is symbolised by the Asian Infrastructure Investment Bank (AIIB) that opened in January this year under China’s leadership.
China aims to encourage the circulation of the yuan through building up infrastructure and the traffic of people and goods through it. Funding will come from the AIIB and China’s own Silk Road Fund.
Concerns about flow: However, there are some possibly serious consequences.
In September, the US Treasury Department subjected a trading company headquartered in Dandong, China, to sanctions on suspicion that the company smuggled goods needed for uranium enrichment into North Korea.
Although the Chinese authorities are reportedly conducting an investigation, there is a widespread view that they only took action when the US confronted them with evidence.
The effectiveness of the US financial sanctions is in large part due to the possibility that the flow of dollar funds can be traced through international fund-settlement networks.
Because an overwhelming proportion of payments are carried out in dollars a large share of smuggling and money laundering comes into contact with the currency. This makes it likely that the starting points of dark fund routes will be exposed and traced.
With an eye on getting into the SDR basket, China began operating the Cross-Border Interbank Payment System (CIPS), an international yuan payments network, in October 2015.
If North Korea were to take refuge within CIPS then the country’s development of nuclear weapons would be even more hidden behind a veil
Slow to liberalise: Some Chinese businesses are using the currency for payments when trading with companies in Southeast Asia and Russia. But non-Chinese businesses told me they use the dollar or the euro, rather than the yuan.
In contrast to its ‘dream,’ enthusiasm for the yuan is not particularly on the rise in China. The liberalisation of financial markets will be indispensable if the currency is to become widely circulated. In China, however, the strengthening of regulations highlights a tendency of moving in the opposite direction.
People involved in finance indicate that the People’s Bank of China recently instructed foreign-owned banks not to exchange their yuan for foreign currencies within China, but to instead take the currency outside the country to exchange it.
This is to keep the currency from depreciating further on the Shanghai yuan market and reflects the government’s strong desire to control the flow of funds and the yuan exchange rate.
In doing this, China has learned a lesson from the 1997 Asian currency crisis — when countries such as Thailand and South Korea suffered devastating damage as a result of currency short-selling by Western hedge funds.
With China’s economy slowing, there is the risk of a selloff and a currency crash if yuan trading is liberalised. This would cause a massive outflow of funds from China and deal a heavy blow to its economy.
President Xi has eyes on his second term, which begins next year, and wants to avoid any slipups in the management of the economy.
“The Chinese government is concerned that opening up capital transactions could send tremendous shock waves through the real estate and stock markets, so it is taking a consistently cautious approach to financial reform,” said Prof Xiang Songzuo of the Renmin University of China.
China’s march toward currency supremacy may be slowing due to the Chinese Communist Party itself.
— The Japan News/ANN