China reviewing strategy for internationalization of Yuan, says official

The yuan rallied to the strongest in more than two years earlier this week, aided by dollar weakness and China’s economic recovery from the virus pandemic.

China is reconsidering its strategy for the internationalization of yuan after completing a comprehensive review recently, according to a senior central bank official.

Representational image. A security guard wearing a mask following the coronavirus disease (Covid-19), outside the Bank of China in Beijing. (REUTERS)

“As everybody knows in the past, the internationalization of the RMB sticks to the market principles,” Zhu Jun, director general of the People’s Bank of China’s international division, said at the Bund Summit in Shanghai on Saturday. “The role of the authorities was mainly focused on removing the policy obstacles for the free use of the currency. At this moment, we think there are some kinds of complications in the domestic and overseas situations.”

The yuan rallied to the strongest in more than two years earlier this week, aided by dollar weakness and China’s economic recovery from the virus pandemic. The prospects of a victory by Joe Biden over President Donald Trump in the upcoming US election are also supporting the currency. Trump’s trade war with China last year sent the currency to its lowest since 2008.

Zhu said going forward the government can be more proactive with policy support to facilitate the role of the markets. For instance, the central bank can improve bilateral currency swap agreements to better promote trade and investments, and try to coordinate various means of yuan cross-border settlements and payments infrastructure.

The authorities will remove existing obstacles for the yuan’s internationalization, with a steady liberalization of the capital account and increasing the RMB exchange-rate flexibility as well as improving liquidity in the bond market, Zhu said.

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And while a steady opening of China’s financial markets to overseas investors has lured inflows, foreign ownership of mainland stocks and bonds is relatively minor. China’s capital account, a term for the flow of funds across borders, currently remains subject to significant regulations on the transfer of the yuan.

Separately, central bank governor Yi Gang said on Saturday the reform of the yuan exchange-rate formation mechanism and the internationalization of the currency should be jointly promoted with the financial opening.

“The yuan internationalization should be market-oriented,” he said. “The regulator’s main job is to reduce restrictions on the cross-border use of the currency, and let it take its own course.”