BE2C2 Report – China is focusing on its efforts to increase the yuan’s status in global finance. Over three years ago, the yuan grabbed a record 2.8 percent slice of global payments, and the trend is continuing.
“There will surely be more utilization of the currency in cross-border transfers this year,” said Ji Tianhe, a China rates and foreign-exchange strategist at BNP Paribas SA.
The Belt and Road Initiative (BRI) has also added fuel to the yuan’s internationalization, particularly in the past two to three years, as work on related projects accelerated.
Pakistan is also among those countries that has opened the door to settling all bilateral trades with China in yuan instead of the dollar (Rs21 = 1 Yuan). According to the State Bank of Pakistan, there is no bar to using the yuan to settle payments for trade and investment from China.
In 2016, the yuan was included in the Special Drawing Right (SDR) basket alongside the US dollar, the Japanese yen, the euro, and the British pound. The move granted the yuan the status of a reserve currency
In Southeast Asia where economic relations with China are closer than in other countries and region,s the yuan usage is getting popular, one expert told the Chinese Media House, the Global Times.
However, he said that relatively strict foreign exchange policies in many BRI markets, as well as insufficient branch network of domestic financial institutions in those markets, are restricting yuan’s internationalization in the short term.
“On the positive side, the growing pace of yuan use in BRI countries has been faster than the yuan’s overall usage in the world in recent years. The trend is particularly evident in some Southeast Asian countries like Singapore,” Zhou Yu, said director of the Research Center of International Finance at the Shanghai Academy of Social Sciences.
Bangladesh Bank allowed other banks in the country to open foreign currency clearing accounts in yuan on Aug 14 2018, recognizing yuan as an international currency to be used in import, export, and any kind of financial exchanges with China
The change is taking place very “naturally” as local companies gradually accept yuan settlement in their increasingly active business interaction with Chinese companies.
This trend is also facilitated by rapid business expansion of Chinese banks in BRI countries, he said.
According to a statement the Bank of China, it has set up 12 offshore yuan-clearing banks, some of which are located in BRI countries like Malaysia. It is also helping local companies use the yuan for business settlement in countries along the routes of the BRI.
The Association of Southeast Asian Nations (ASEAN) and its East Asian partners consider adding Chinese and Japanese currencies to their $240 billion currency swap safety net, business journal Nikkei Asian Review reported
“As a Chinese company, we of course want to settle balances in yuan, which would help us avoid many exchange rate risks,” Fu said.
But Zhou cautioned that the strict foreign exchange policies in BRI countries, which are in general tighter compared with the developed countries, will hinder the yuan’s internationalization.
China’s State Administration of Foreign Exchange on April 22 published a report summarizing the foreign exchange policies of 123 countries and regions that have signed BRI cooperation documents with China.
According to this report, those countries have different foreign exchange policies but most of them impose some level of restrictions, like cross-border capital flow controls, quota management programs and currency exchange limits.
In the long term, it is believed the yuan’s internationalization will be an inevitable trend. It will also be a trend that not only benefits China but benefits BRI countries as many of those countries are also thirsty for foreign exchange,” the report added.
The idea of moving away from the dollar in global trade has become a trend lately among countries including Russia, China, Japan, Iran, Turkey, Venezuela, and others.
(BE2C2 Report is a data journalism initiative of Irshad Salim Associates, a New Jersey, USA, based consulting firm in association with BE2C2 in Pakistan)