Bank employees count Chinese yuan (ren yuan) or yuan memos next to the US dollar notes of Kashkorn Bank in Bangkok, Thailand on January 26, 2023.
Athit Perawongmetha |Reuters
China is devising more ways for foreign institutions to use the yuan as international trust in the US dollar lurking.
The move is aimed at challenging the greenback, experts said. The timing is advantageous as the US dollar index fell by more than 9% this year. Meanwhile, the offshore yuan has strengthened its dollar by more than 2%.
In a sign that Beijing’s determination is growing and seducing the world from the dollar, in a speech at the prominent Lujazzi Forum last week, People’s Bank of China Governor Pan Gongsheng discussed “how to undermine excessive reliance on a single sovereign currency.”
He also announced plans to establish a centre for digital yuan internationalization in Shanghai and promote trading of yuan forex futures. Beijing has already rolled out a digital version of its currency to replace cash and coins in circulation.
Much of Beijing’s recent movements have focused on the futures market.
Three major Chinese exchanges announced last week that qualified foreign institutional investors could trade contracts for options with 16 futures listed in mainland China.
According to the release of Shanghai, Darian and Zhengzhou replacements, the items covered include natural rubber, lead and tin.
This follows the addition of dozens of other tradable futures contracts for foreign institutional investors earlier this year.
In addition to expanding the range of hedged products for international organizations, Zhou noted that these contracts will increase the original impact on the global merchandise pricing system.
In another step to encourage global investors to use the yuan, in late May, the Shanghai Futures Exchange announced that it was gathering feedback on a proposal that would allow the yuan currency to be used as collateral for transactions that settle with the yuan.
Other recent moves include incrementality, but China will allow qualified foreign investors to participate in exchange-sales fund options, which are currently trading from October 9th for hedging purposes. Earlier this year, authorities reportedly announced a 500 Yuan fee waiver for international financial institutions to open local accounts to access the bond market.
Morgan Stanley announced in January that local subsidiary could officially begin offering securities services for mainland China’s commodity futures, and planned to expand to fairness and fixed income futures and options once they receive the required qualifications.
Such access has been around for many years as the US financial giant said in May 2023 that it would establish a fully owned securities company within the country with Chinese approval.
While global finance institutions and investors have long been interested in diversifying into China, strict control over Beijing’s capital outflow and relatively opaque systems has hampered the massive purchase of mainland China’s assets.
Matt Gertken, the lead geopolitical strategist at BCA Research, said that while some are worried about the unpredictability of US policies in recent months, China has yet to emerge as a reliable alternative.
“China’s rule of law is inferior to the US. It does not provide a large, deep, liquid assets pool open to foreign investors like the US,” he said, adding that Beijing has not fully addressed the geopolitical risks associated with the market.
Global payments
It’s not just an investment product. For many years, China has developed a vast network of former liquidation banks offshore, promoting cross-border interbank payment systems.
According to an analysis released by the US Federal Reserve last month, Chinese banks to emerging market economies switched loans to emerging market economies to yuan instead of yuan instead of yuan instead of yuan.
The world’s second-largest economy is promoting the Original Bilateral Trade Reconciliation, with Hong Kong companies announced $100 billion in February to access the Original Dominant Funding.
Dan Wang, director of the Eurasian Group’s China team, said, “China appears to be accelerating its decooperative efforts, but progress remains uneven,” but the increase in religious religious settlements for cross-border payments between China and overseas energy and commercial enterprises has increased.
Another trend to help Yuan internationalize is the expansion of Chinese companies overseas, particularly small and medium-sized businesses selling products online.
Financial partners Goldman Sachs and HSBC say that China-based customers can easily use them for business both in China and overseas, according to Startup FundPark.
Chinese authorities are also subsidizing some of the interest costs on loans derived from offshore Yuan, said Bearoo, China’s general manager at Fund Park. He said overall use of the currency remains low but is growing, but refused to share certain numbers.
At a global level, the Chinese Yuan lost some position in May due to international use, according to Swift’s yuan. This data showed that 2.89% of global payments from the original May value were accounted for by May value, which was reduced from fifth place in the previous month.
According to Swift, the US dollar accounted for 48.46% of global payments, followed by the euro of 23.56%.
Derailed
Beijing’s latest efforts to promote the Yuan have coincided with a broader, more coordinated shift from the Asian dollar recently. The region is gradually reducing its reliance on the US dollar, driven by geopolitical tensions, changing currency dynamics and increased use of currency hedges.
Policy uncertainty by US President Donald Trump has encouraged a prominent greenback sale.
Ning Sun, senior EM strategist at State Street Global, said that foreign investors who are leaving the US and are trying to hedge against US assets and generate original assets are also boosting the yuan.
“Our own data shows a strong inflow into CNY given the good performance of CNY financial assets. Our data only tracks institutional investors who are still very underweight in CNY.”
