Recent reports have suggested remarkable progresses in the globalization of the Renminbi yuan and significant improvement in the global standing for the Chinese currency. Data from the Bank for International Settlements showed the yuan, for the first time, has made the list of top 10 most-actively traded currencies in the world, ranking the ninth, with the trading turnover accounting for 2.2 percent of the global total. Some analysts pointed out that the recent elevation in trade activity is a manifestation of China’s economic rise and status in the global manufacturing industry, and the yuan will likely undermine the dominant role of the US dollar in the global trade system in the future.
Yi Xianrong
China is accelerating the globalization of the yuan. The government’s opening-up policy has made significant progresses in terms of the market-oriented reforms of exchange rates of the yuan and its encouragement for companies to go global. This has led to an increasing level of recognition for the yuan in the international market, particularly since the global financial crisis in 2008 that erupted from the United States. For instance, trade settled in the yuan has been increasing, and more and more offshore yuan trading centers have been set up across the world. However, we should stay sober-minded; in that, the yuan, compared with other international currencies, still lags far behind in terms of degrees of openness, and the internationalization of the yuan should not be measured solely by its trading turnover in the global foreign-exchange market.
First, the proportion of a currency in the global trading of foreign-exchange market constitutes only a minor part in the currency’s internationalization, it, therefore, could not prove the currency’s status in the international market. Furthermore, the volume of a currency in the global foreign-exchange market may be comparable with the size of the economy, and may also be manipulated by speculative trading. Under the latter circumstance, it could only show that international investors use the yuan for arbitrage trading, and could not manifest the levels of the yuan internationalization. Second, as far as China’s real economy is concerned, the GDP is the second-largest in the world and the proportion of the Chinese currency in the trading volume in the global foreign-exchange market is only about 2 percent, this proves that the levels of globalization of the Chinese yuan is still far behind other international currencies. China’s foreign trade value is huge and the proportion of its GDP in the global total is incredibly high, yet the trading volume of the yuan in the international market ranks only the ninth, this is far out of proportion with the size of its real economy.
For the internationalization of the Chinese yuan, the most important factor should be the proportion of the yuan among all settlement currencies in international trade, and the proportion of the yuan in the total volume of investment currencies and foreign-exchange reserve currencies. At present, the proportion of the yuan as a settlement currency in international trade is only about 0.5 percent, and there is still a long way to go before the Chinese yuan becomes an investment currency and foreign-exchange reserve currency. If the proportion of the yuan in the international market is low in these three aspects, or is too low to measure, it would be then meaningless to talk about the global position of the yuan in the international market.
Under the current circumstances, it will be safe to say that the yuan is not an international currency yet. At present, the capital account of the yuan is yet to open fully and the yuan is not freely convertible. Let’s take a martial arts contest as an example. If someone claims he is a master of martial arts but has never competed in any contests, how could it be possible for others to recognize him as a martial art master? This could also apply to the issue of the yuan internationalization. If the yuan could not be freely convertible and if the capital account does not open completely, there will be no exaggeration to say that the yuan has not yet entered the international market, or to say that the yuan has just started to tap into the global market.
Due to the fact that the yuan is not freely convertible, we should open further to the outside world and speed up the pace for the yuan globalization, but we should not overestimate the levels of the yuan internationalization, and at the same time, should not allow others to underestimate China. For the levels of internationalization of the yuan, it does not mean that the higher the better. Instead, it depends on China’s economic conditions, on the development of China’s real economy, and on the risk assessment of international markets. If China allows the yuan to become a freely convertible currency in a hasty way through overstressing the levels of the yuan’s internationalization, China will then have to face higher risks in the foreign-exchange rates. Surely, the “free convertibility of the yuan” is not a demon. It could help prevent risks if it is forever contained in a cage, but it will also be destructive to China’s economic development.
Exchange rate is a kind of pricing mechanism. If it is always controlled by the government, and has not become oriented towards the international markets due to government control, it will be impossible for the yuan’s effective exchange-rate mechanism to be formed. And if the yuan exchange rate is not decided by the effective market pricing mechanism, it will naturally lead to pricing twists in the exchange rates. And such pricing twists could also have an impact on other prices at the financial market (such as interest rates), and could even have an impact on the effective operation of resources of the entire financial market. Therefore, exchange rate is an important pricing mechanism on the domestic financial market, and such a pricing mechanism could only be realized through the channel of the market. Judging from the current circumstances, however, it is obvious that the effective pricing mechanism of the yuan has not yet formed; on the contrary, government’s dominant influence on the yuan’s exchange rates could be seen at anytime, and anywhere. These are the realities we still have to face and are what we will have to work on.
In a word, the active level of the yuan in the global foreign-exchange market is just an indication for the yuan’s internationalization, but it is not the most important factor. We, therefore, should not overestimate the degree of the yuan’s globalization simply based on this factor, instead, we should further accelerate the pace of opening it up to the outside world in accordance with China’s conditions and the international market environment, and establish an effective exchange-rate pricing mechanism for the yuan. This is the most important factor to the healthy development of China’s financial market.
Yi Xianrong is a researcher of the Finance Institute of Chinese Academy of Social Sciences.
