Even as China was battling the Covid pandemic, which was slowing down its growth, and the financial crisis created by the collapse of major realtors led by Evergrande, its currency renminbi (RMB) or yuan overtook the Japanese yen in global transaction volume. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) reported that while the RMB accounted for 2.7% of the market, the yen’s share had declined to 2.58% and the US dollar retained its dominance with a share of 41%. It is also significant that China’s GDP had crossed that of Japan earlier.
With the increasing role of the yuan in global trade, policymakers at the Peoples’ Bank of China (PBoC) were somewhat happy. Along with marking this as a milestone on the road to the currency’s internationalisation, they are also aware of the long way ahead to fully realise that objective.
On the yuan’s rise on the global stage, it is a long story that we are cutting short. Full credit for visualising and operationalising the idea of making the yuan a global currency goes to Zhou Xiaochuan, who was the governor of the PBoC from 2002 to 2018. He was a legendary banker whose record is not as widely known as those of the Western worthies. In a seminal essay (Reform the International Monetary System, 23 March 2009, BIS Review 41/2009), he outlined the pitfalls of the existing monetary system dominated by a single currency, which was a national as well as reserve currency. This situation creates financial instability and hence he argued for widening the reserve basket. Given the extraordinary progress made by China in global trade, he sought the inclusion of the yuan in the Special Drawing Rights (SDR) basket. He wanted a seat at the high table for China.
It took a couple of years of negotiations and intensive studies by the IMF experts to accept China’s claim. It might also be added that those were the years when the US was keen to promote economic relations. Christine Lagarde, the then MD of the IMF, was committed to the idea. Finally, the IMF approved the inclusion of the yuan in the SDR and it became effective from 1 October 2016. It was truly a personal victory for Zhou. It did not come easily. To achieve that ambition, China’s authorities had to take several reform measures to widen the use of the yuan in global transactions. They created offshore centres to permit trade using the currency and encouraged the issue of yuan-denominated bonds; dim sum bonds became the flavour of the Asian market and bilateral swaps were entered into with many countries. Its One Belt One Road (OBOR) or BRI initiative led to wider use of the yuan in trade, loans and grants. In some parts of Asia and Africa, the currency became a legal tender. Several studies suggested that the RMB’s inclusion in the SDR added impetus to its internationalisation. Many central banks, including that of Switzerland, have included the yuan in their reserves.
Whatever the measure, whether SDR or SWIFT, as Bloomberg reported, “Yuan’s global popularity keeps increasing with usage at record high”. It observed that the currency’s usage has jumped as international funds boosted holdings of Chinese government bonds, pushing their share to high levels. Moreover, payments towards oil (crude) supplies are being made in yuan as in the case of Gazprom. The increase in the number of sanctions adopted indiscriminately by the US is driving many countries away from the dollar. The functioning of the RCEP, the new trading arrangement, will boost yuan transactions. There is also the view voiced by Professor Sun Lijian of Fudan university that the “dollar is losing its ability as an anchor for other currencies because of its volatility in the currency market”.
Recent trends in currency and equity markets suggest that China has become a buffer to absorb the shocks in the Western markets. Despite the disturbed conditions in China, there is evidence of large inflows. The PBoC and State Administration of Foreign Exchange (SAFE) have credibility in their policies and governance, the legacy of Zhou and the team he has left behind. Yi Gang, the present governor of PBoC, carries on that tradition with aplomb.
Yi advocates regional cooperation among emerging economies and the use of local currencies. “Emerging markets should improve their resilience,” he says. “This is where regional cooperation has a key role to play.” His specific reference is to the unilateral stances of the advanced countries such as the US creating “taper tantrums” that destabilise developing countries. Regional cooperation will prevent these hiccups.
A major handicap China faces is that further progress on internationalisation of its currency will depend on full capital convertibility. China’s leadership prefers economic stability at any cost. It seems that while Zhou was inclined to adopt it, the Politburo and the leadership were not willing to gamble with economic stability. The moral is that though China has a seat at the high table, it will have to wait for a longer time for its currency to become global.
Served in the Ministry of Finance, GOI, and retired as Joint Secretary