China is an economic giant, but its money is still a bit of a runt. Unlike the dollar, euro and yen, it’s little used away from home. The No. 1 exporter has kept its currency off world markets and restricted buying and selling. That walled off China from boom-and-bust capital flows and kept its goods cheap. Now it has reason to loosen the grip on the renminbi, which means “the people’s currency,” and is better known by the name for its biggest unit, called yuan. To fuel a slowing economy and back rising political ambitions, China is now promoting the use of the yuan throughout the world, a slow-moving process known as internationalization. It’s one of the biggest changes in global financial markets since the creation of the euro, a beckoning bonanza for bankers and traders — as well as a threat to China’s stability.
China is pushing for the yuan to be included among the basket of currencies that officially qualify as reserves for global central banks, joining the dollar, euro, yen and British pound. In May, the International Monetary Fund gave this effort a boost when it dropped its long-held view that the yuan was undervalued. The yuan had risen against all 31 major currencies during the previous 12 months. Mainland officials have eased restrictions on the currency, but there’s still a long way to go: China accounts for more than 10 percent of world trade, yet only about 2 percent of global payments are made in yuan.
Private investors — both Chinese and non-Chinese — can legally move their money in and out of the country only through approved programs and in limited amounts. More than a dozen countries are vying to become yuan trading hubs and have signed swap agreements that make it easier to trade. China also wants its currency used for more overseas loans — part of the reason it’s leading the charge to create the first new international development bank in decades. In November, a trading link opened between the Hong Kong and Shanghai stock exchanges, though the daily flow of funds is capped. It gives any foreigner access to the local market for the first time via Hong Kong and sent money streaming into Shanghai’s stocks. The yuan is currently managed to fluctuate 2 percent above or below a daily, government-set fixing to the U.S. dollar. In 2014, it weakened for the first time in five years.
Read Full Article HERE