Internationalisation of the Yuan: Securing China’s financial system


China’s decision to introduce in 2018 the gold-convertible petro-gazo-Yuan currency is an important step in the process of internationalisation of the Yuan. It confirms the will of Beijing (asserted for a decade already) to impose the Renminbi (official name of the Chinese currency) as new global reference currency. In October 2016 the IMF decided to introduce the Yuan into its own currency basket of the Special Drawing Rights (SDR), after a series of reforms and intense Chinese pressure. This was a very important step in this internationalisation process. The birth of the petroyuan, more than a year later, is another one.

The Chinese contradiction: the need to control AND liberalise 

The Chinese government is accelerating this movement by enshrining it into a broader strategy. The signs, from this point of view, are quite visible. In August, Beijing’s government announced 22 corrective actions to open access to financial markets[1]. One month later, the report of the China Finance 40 Forum, which includes members of the central bank and of the People’s Bank of China (PBoC), called for further liberalisation of the Yuan market from then on[2]. At the beginning of October, Zhou Xiaochan, the governor of the PBoC for 15 years, on his way to leave office at the end of the year, pleaded for a “triple liberalisation”: that of capital, trade and the Yuan[3]. According to him, China shouldn’t wait for “the conditions to be ripe” to let the Yuan float freely. For the PBoC’s governance, China’s future economic development requires the internalisation of the Yuan in order to attract foreign capital. It would then be a boost to a growth which is actually fragile and artificially inflated by debt.

On October 18, before the 19th Congress of the Chinese Communist Party (CCP)[4], an internal debate on the Yuan was initiated among Chinese leaders. As a matter of fact, last March, the authorities tightened their control over the currency by introducing “counter-cyclical” adjustment factors[5] and by strengthening capital control in order to blunt the impact of market swings. With the Fed’s monetary tightening and China’s economic slowdown expected in the second quarter, investors began to attack the Yuan. But the Chinese government can not afford to see currency depreciation. China’s financial situation is indeed precarious. Current growth is mainly based on bank loans and the housing bubble. Beijing is now openly afraid of a financial crisis, and this is also what the IMF[6] foresees as well as rating agencies like Moody’s and Standard & Poor’s, which downgraded China’s sovereign credit rating respectively in May[7] and September[8]. Allowing the Yuan to fall would have triggered a capital flight towards the dollar, which could have led to a panic and the collapse of the Chinese financial system. Hence this decision to regain control of the Yuan and artificially maintain its rate high.

Thus China must face two partly contradictory challenges. On the one hand, it needs to make the Yuan a global reference currency. On the other, there is need to avoid any possible collapse of the Chinese financial system in case of a sharp depreciation of the renminbi. Indeed the control measures of the Yuan may have maintained its price against the dollar, but have several negative effects. The sentiment rapidly developed that it was the Chinese central bank which, once again, unilaterally fixed the exchange rate[9]. Therefore, for investors, it became impossible to really anticipate the evolution of the Chinese currency by using strictly macroeconomic factors. However, regardless of the fact that this anticipation isn’t often happy, it nevertheless fuels the currency-backed financial products which represent nothing less than the most important financial market worldwide.

By maintaining its control policy, China is taking the risk to see the Yuan losing its ranking as international currency. The latest statistics already announced by the Swift agency show a loss of speed of the Yuan as global transaction currency. From 2.8% (percentage of all transactions in August 2015) it passed two years later to 1.9%[10]Read more in the GEAB 119 / 2017


[1] Source: South China Morning Post, 25/09/2017
[2] Source: South China Morning Post, 25/09/2017
[3] Source: South China Morning Post, 09/10/2017
[4] Source: The Guardian, 12/10/2017
[5] Source: Reuters, 25/05/2017
[6] Source: Telegraph, 15/08/2017
[7] Source: Bloomberg, 24/05/2017
[8] Source: Bloomberg, 21/09/2017
[9] Source: South Morning China Post, 02/06/2017
[10] Source: South Morning China Post, 30/09/2017