China moves to ‘globalise’ yuan

China has signalled a seriousness of intent in ‘internationalising’ the yuan by appointing a high-profile task force to draw out a roadmap to that ambitious goal, which some economists believe will be realised sooner than most believe.

“The latest indications suggest Chinese policy makers are very serious about the plan to internationalise the local currency,” says HSBC economist Qu Hongbin. He sees two underlying reasons for this: one, Chinese leaders see internationalising the yuan as “the best solution to free themselves from a dollar trap”; and second, as the third largest economy and now the world’s largest exporter, “it doesn’t make sense for China to use the US dollar to settle more than 70% of cross-border trade.”

Vice-premier Wang Qishan, who is in charge of foreign trade and finance, has been appointed to additionally head a taskforce to oversee the moves to make the renminbi the currency of choice for trade settlements, especially with regional trading partners.

Hu Xiaolian, vice-governor of the People’s Bank of China, is being enlisted to head the research division of the taskforce. Officials from six other central departments have also been drafted to the taskforce.

“China really wants to give a big push in internationalising the renminbi,” notes Qu. “Of course it would be a multi-year, long-term process”. Still, he adds, the initial stage of expanding the renminbi’s role in trade settlement could be “faster than many expect”.

Since China recently became the world’s largest exporter and is the second-largest trading country, expanding the role of renminbi in cross-border trade settlement is “simply a catch-up game,” says Qu. “I won’t be surprised if, in the next three to five years, around half of China’s annual cross-border trade is settled in renminbi rather than US dollars.”

Given the high volume of China’s trade, even if half of its trade flows are settled in renminbi, that would make it “one of top three international currencies in the world.” This, he adds, “will have a substantial impact, not only on China but also the global economy.”

The renminbi is of course not fully convertible on the capital account, but those restrictions don’t apply to capital flows related to trade.  “If China wants to take further steps in internationalising the renminbi to play a bigger role in capital flows, it will require liberalisation of capital account controls,” Qu points out “But in the initial stage of trade settlement, the current regulation won’t become an obstacle to the plan.”

Some economists argue that fears about China’s “de-dollarisation” strategy are overstated. “The attention paid to China’s worries about the US dollar is overdone,” says RBS economist Ben Simpfendorfer. Although Chinese officials have in public appeared to challenge the status of the US dollar, internal debates among Chinese officials and academics “is far more diverse than these public statements imply.”

But Morgan Stanley’s Asia chairman Stephen Roach has, in a recent book, flagged the risk of a Chinese boycott of US Treasury auctions if - as he believes will happen - the US Congress passes protectionist legislation aimed at imports from China.

Such an eventuality, he warns, would “trigger a full—blown crisis in the US dollar” and lead to a spike in real long-term US interest rates. “That would exact a severe toll on a bruised and battered US economy, to say nothing of the rest of the world,” writes Roach.