China Will Do More to Boost Yuan’s International Use, PBOC Official Says

The opening of China’s financial markets over the past decade has given significant impetus to the internationalization of the yuan, but more needs to be done to encourage overseas investors to use the Chinese currency, a senior official at the People’s Bank of China (PBOC) said.

The central bank is working on a range of policies to support further opening and resolve the various pain points and obstructions that continue to concern investors in the country’s capital markets, Huo Yingli, head of the PBOC’s macro prudential management bureau, wrote (link in Chinese) in a recent issue of China Finance, a publication of the central bank. At the same time, the PBOC will pay close attention to the need to manage the risks and volatility that could accompany the process of opening-up, she said.

Huo’s article is one of a series published by China Finance to mark the 10th anniversary of the start of China’s efforts to turn the yuan, also known as the renminbi, into an internationally used and accepted currency. In July, Pan Gongsheng, a deputy governor of the PBOC and head of the foreign-exchange administration, penned a commentary in which he said that trade tensions, rising populism and the increasing use of local currencies in cross-border trade are opening new opportunities for the yuan to be used around the world.

“We will continue to improve policies and infrastructure to encourage cross-border use of the renminbi and improve macro prudential management of cross-border capital flows,” Huo said.

“We will continue to optimize other supporting policies and measures to promote the opening of financial markets, such as clear tax arrangements, the introduction of overseas rating companies, derivatives transactions that can be applied to internationally accepted master agreements, and flexibility in centralized clearing of derivatives transactions,” she wrote.

Significant progress

The PBOC will relax the cap on yuan-denominated cross-border trade, ease limitations on the remittance of funds overseas by foreign investors, and unify regulations covering different investment channels which will allow overseas investors to transfer funds among different accounts in those channels, Huo said.

The opening of China's financial markets has accelerated markedly over the past decade — access to the bond market, stock market, and financial derivatives markets has been broadened, cross-border investment and financing channels have been expanded, and institutional arrangements to allow foreign participation in financial markets have been improved, she said.

China has made significant progress in internationalizing the yuan over the past decade, with use of the currency for cross-border payments growing from virtually nothing to 15.85 trillion yuan in 2018, a 46% jump on 2017, Huo said.

Nevertheless, the yuan is still not a widely used currency in international payments.

Data from Swift, the international payments firm, show the yuan only accounts for around 2% of cross-border transactions and even then, they mostly involve bilateral payment and settlement between China and its trading partners, she said.

Capital is flowing into China’s financial markets and foreign holdings of yuan-denominated assets are growing rapidly, Huo said, pointing to data from the Institute of International Finance that show foreign capital flows into the country’s bond and stock markets amounted to $99.5 billion and $60.7 billion, respectively, in 2018.

The improvements have come partly as a result of an easing of restrictions, Huo said. The two Stock Connect programs between Hong Kong and the Shanghai and Shenzhen exchanges have scrapped the two-way quota on cross-border transactions and substantially increased the daily investment quota.

Limits on the remittance of funds overseas by foreign investors have also been eased. Since 2018, the lock-up period on investments made through the QFII/RQFII foreign investor programs has been abolished and the limit on monthly remittances has been dropped.

Actively adapt

The PBOC has also extended onshore financial services to the offshore market, Huo said. When the Bond Connect between Shanghai and Hong Kong was launched, foreign investors were allowed to exchange yuan through Hong Kong banks at the onshore yuan rate, which is often different from the offshore rate.

Overseas central banks have also been adding the yuan to their reserves since the currency was included in the Special Drawing Rights (SDR), an international reserve asset created by the International Monetary Fund whose value is based on a basket of major currencies including the U.S. dollar. The yuan was added to the basket in October 2016.

Nevertheless, despite all the progress, foreign holdings are still low compared with the size of China’s financial markets, Huo said.

Against the backdrop of significant changes in the international economic and geopolitical situation and growing trade friction, the international monetary system is facing challenges, Hu said.

The PBOC will actively adapt to meet the needs of China’s new economic development path which is focused on high-quality growth. The central bank’s actions will respect the market and respond to market demand, and continue to promote the opening of financial markets, improve the infrastructure and policy framework for cross-border use of the yuan, and continuously improve the macro prudential management of cross-border capital flows, Huo said.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com)