Yuan's internationalization slows in 2016

Updated 2017-07-17 09:24:13 Global Times
Yuan's share in global payment

Yuan's share in global payment

Long-term trend intact as nation integrates with world

The internationalization of the yuan has headed into a consolidation phase after a period of rapid expansion, according to a report released by the Renmin University of China on Saturday.

For 2016, the yuan internationalization index, an indicator used by the report, stood at 2.26, down 29.8 percent year-on-year, the 2017 edition of the report showed.

The reading signals that the internationalization of the Chinese currency has entered a phase of adjustment and consolidation, although the yuan is still on a long-term path toward greater internationalization.

The change in the pace of the yuan's internationalization last year took place amid a slack global economic environment, contracting ultra-low world trade growth and investment, increasing geopolitical risks and uncertainties, as well as a rising trend of anti-globalization and populism, the report said.

Domestically, while China's structural supply-side reform moved forward, there was a short-term impact on the yuan's internationalization process under the dual pressure of depreciation and capital outflows and the persisting economic downside risk.

Whereas the yuan's internationalization ebbed last year in areas such as trade settlement, offshore capital pools and dim sum bonds, the currency was more widely used in direct investment, panda bonds, international credit, foreign exchange transactions and reserve currency holdings, according to the report.

The yuan fell to sixth place in 2016 among the most-used currencies as yuan-denominated global payments by value dropped 29.5 percent, the report noted, citing data from the global transaction services organization Society for Worldwide Interbank Financial Telecommunication.

By function, the yuan's internationalization process in 2016 was undermined in terms of trade, as its cross-border settlement value dropped 18.6 percent and its share of global trade transactions fell from the 2015 high of 4.07 percent to 2.11 percent in 2016, the report said.

The report suggested that given the yuan's weakened role in trade, it is necessary to develop and enhance its role in the financial markets, including financial settlements.

Xie Yaxuan, a senior economist with China Merchants Securities, said that the decline in the yuan's international profile demonstrates that the internationalization process is a long-term one.

"There will be steps forward and steps back. We should see these fluctuations as part of the process of eliminating destabilizing factors for the yuan's internationalization. For instance, the offshore yuan deposit level began to stabilize after a period of dropping, and those who still hold yuan deposits are really confident," Xie told the Global Times on Sunday

Liu Xuezhi, a senior analyst at Bank of Communications, told the Global Times on Sunday that the twin pressures of yuan depreciation and capital outflows had dissuaded many global investors from using the currency in international settlements and affected the progress of internationalization in 2016.

Regulations aimed at curbing capital outflows, which were intended to help the broader economy, also contributed to the slowdown, Liu added

As to the report's suggestion of boosting the yuan's role in financial settlements, Xie said that trade settlements should remain the focus of the internationalization drive.

"The China-proposed 'One Belt, One Road' initiative, which is a massive infrastructure connectivity program linking Asia, Europe and Africa, is providing fresh impetus for yuan settlement under the current account and there is still potential to tap," Xie said.

Also, such settlements relate to merchandise and services trade, which are of fundamental importance to China's relationship with the world.

Xie forecast that the yuan's internationalization score would improve this year, compared with 2016. "China's commitment to globalization and its own opening-up policy, as well as demand generated when China integrates with the world at a deeper level, are the fundamental drivers of the yuan's internationalization," Xie said.

Liu also forecast that the yuan will perform better in 2017. "The better-than-expected GDP figure for the first half is stabilizing market sentiment and we don't see irrational capital outflows like those observed last year," Liu said.

Although there might be occasional setbacks, the long-term trend of the yuan's internationalization will remain intact, Liu added.

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