China is accelerating its initiatives to promote the yuan as a viable alternative to the U.S. dollar in international trade. The PBOC is aggressively promoting the use of the yuan in bilateral trade settlements. They’re paying special attention to markets in Asia and other emerging areas.
In February 2023, China went all in with a surprise $100 billion investment. This plan was announced to bring Hong Kong businesses yuan-denominated financing. This change is seen as another step in a larger effort by Beijing to increase the yuan’s international prominence and make cross-border transactions easier.
As shown during the recent Lujiazui Forum, PBOC Governor Pan Gongsheng further elaborated the bank’s strategy and idea of decreasing reliance on the dollar. He emphasized the importance of finding ways to “weaken excessive reliance on a single sovereign currency.” This comment matches China’s increasing aspiration to alter international monetary dynamics.
China’s efforts extend beyond mere rhetoric. The country is taking impressive steps to allow their QFIIs to play in the trading sandbox. Starting next month, they’ll be allowed to trade futures and options contracts on the mainland exchanges. This policy move is designed to lure in more foreign capital and bring the world’s investors into China’s capital markets.
Yet as recently as May 2023, China reached an important milestone. It just received U.S. approval to launch its own, wholly-owned brokerage, which will facilitate easier entry of foreign investors into its market. These moves are the latest signals of China’s long-term strategic push to develop its own robust, competitive, transparent and liquid futures market.
Beginning, October 9, 2023, China will allow its exchanges to be opened up to qualified foreign investors. These investors are now allowed to trade exchange-traded fund (ETF) options, and predominantly for hedging purposes. This is partly intended to increase international participation and support the yuan’s inclusion in global investment portfolios.
China has further established an offshore yuan clearing bank network and advanced its Cross-Border Interbank Payment System (CIPPS). These infrastructures are a prerequisite for facilitating yuan transactions and making the currency more liquid for users beyond China’s international borders.
Chinese companies are going abroad, at least the smaller type — smaller companies that are selling online. This rapid growth is very important since it helps support the case for the yuan’s internationalization. In fact, these businesses are leading the way in cross-border trade. Consequently, they are opting for yuan settlements, helping to expand the currency’s international footprint.
To further incentivize participation in its financial markets, China waived a 500-yuan fee for international financial institutions wishing to open a local account for accessing the bond market. Additionally, Chinese authorities have been subsidizing some interest costs for loans denominated in offshore yuan, making it more attractive for foreign investors to engage with Chinese assets.
China’s well ahead in digital currency innovation. The country is about to open an internationalization hub for the digital yuan in Shanghai. This project intends to increase the international adoption of its digital currency. The digital yuan is meant to replace some of the cash and coins currently in circulation. This innovation is a significant development to the regulatory sandbox in China’s financial technology scene.
As of May 2023, the yuan accounted for only 2.89% of global payments by value. This is indicative of its growing adoption in global commerce. China is in the midst of re-establishing its dominance in global commodity price setting. They’re accomplishing this by slowly increasing the yuan’s role and increasing the hedging products for international institutions.
Despite these efforts, some experts caution against overestimating the yuan’s potential to replace the U.S. dollar as the dominant global currency. Matt Gertken, a geopolitical strategist, noted, “China’s rule of law is inferior to the U.S. It does not offer a large and deep pool of liquid assets that is open to foreign investors like the U.S.” Such observations underscore long-standing issues of transparency and accessibility within China’s financial system.
Nevertheless, data from proprietary sources indicates strong inflows into the Chinese yuan (CNY), attributed to the favorable performance of CNY-denominated financial assets. Ning Sun pointed out that their unique data indicates a lot of new, sudden inflow into CNY. This should not be so surprising, given the remarkable performance of CNY financial assets. Our data only follows the institutional investors, but they are still extremely underweight in CNY. Some might be skeptical of yuan’s increasing acceptance. Institutional investors are beginning to understand its promise.