By+Deng+Yaqing

After continuous appreciation in 2017， Chinas currency， the yuan， has maintained this trend into the new year， boding well for its long-term target of internationalization.

According to statistics from Chinas State Administration of Foreign Exchange， in January 2018 the yuan witnessed its central parity rate gain 3.1 percent against the U.S. dollar—more than half the 5.81 percent increase seen across the whole of 2017， which itself marked the most drastic annual appreciation seen in the past nine years.

“The weakening of the U.S. dollar and Chinese authorities reinforcement of supervision over capital outfl ow， such as overseas mergers and acquisitions， are two causes behind the strengthening of the yuan， but a robust Chinese economy is the major driving force，” Xu Hongcai， Deputy Chief Economist of the China Center for International Economic Exchanges， told Beijing Review. Chinas economy expanded 6.9 percent last year， well above the governments annual target of around 6.5 percent， marking the fi rst pickup in pace in seven years.

“As Chinas economy continues to move forward， the yuans internationalization will be achieved， but it will be a long， slow and uneven process，” Sun Jie， a research fellow with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences， told Beijing Review.

A reserve currency

“In 2017， steady progress was made in the yuans internationalization， which can be summarized as a return to growth， more solid foundations， enhanced convenience and brighter prospects，” said Zhang Qingsong， Vice President of the Bank of China， at a press conference on the banks report on the yuans internationalization held on January 31.

“The yuan has become the seventh larg- est reserve currency in the world， and more than 60 countries and regions now include the currency in their foreign exchange reserves， the total amount equivalent to over $100 billion，” Zhang said， noting that from the perspective of global portfolio optimization， the market demand for yuandenominated assets looks set to skyrocket in the future.

In June 2017， the European Central Bank announced the exchange of 500 million euros worth of U.S. dollar reserves into yuan securities. In January， the Bundesbank， Germanys central bank， also decided to hold some currency reserves in the yuan as part of its long-term strategy.

“The presence of the yuan in foreign exchange reserves is real but unimpressive. Actually， the fi gure has been on the decline due to stricter capital control，” said Xu.endprint

According to data released by the IMF at the end of September 2017， for the fi rst three quarters of last year the yuan accounted for 1.12 percent of foreign exchange reserves worldwide， compared with 63.5 percent registered by the U.S. dollar.

Zhang also said that the yuans international status lags behind the global status of the Chinese economy.

“Chinas GDP makes up more than 15 percent of the world total， while its foreign trade and international investment contribute more than 11 percent combined. Therefore， there is huge potential for the yuans internationalization，” said Zhang.

Cross-border use

In order to facilitate mutual exchange， the Chinese Government has launched a series of policies to boost the convenience of cross-border yuan use. Macro-prudential management policies have been unveiled to lubricate cross-border financing， making it more convenient for domestic institutions to borrow offshore funds and clarifying the business procedures of overseas institutions entering the domestic bond market.

Since the end of 2017， over 250，000 enterprises and 245 banks have been engaged in cross-border yuan transactions， while 195 countries and regions have conducted cross-border yuan receipt and payment with China， according to statistics from the Peoples Bank of China （PBOC）.

In 2017， the yuan settlement of current accounts and cross-border direct investment totaled 6 trillion yuan （$948 billion）， with the Chinese currency now ranking sixth globally for payments， accounting for 1.75 percent of the worlds total.

In January， the PBOC published a notice on improving cross-border yuan business policies to facilitate trade and investment， which has increased cross-border yuan use by promoting transnational direct investment， personal settlement and business innovation.

According to the Bank of China report， among the 3，134 industrial and commercial enterprises and 118 financial institutions at home and abroad surveyed， 76 percent believe that the yuan is likely to catch up with the U.S. dollar， euro， British pound and Japanese yen as an international currency， while more than 60 percent suggested that they would begin to use or elevate the use ratio of the yuan.

“This is testimony that the global financial market and real economy are demanding the international use of the yuan，”said Zhang.

The report also shows that 74 percent of the surveyed foreign companies have conducted cross-border yuan receipt and payment， while 25 percent also have yuandenominated assets or liabilities.endprint

Gaining momentum

“In the future， the yuans internationalization will usher in a new round of acceleration，”said Zhang， who explained that the process is likely to be driven by three factors.

First， the Belt and Road Initiative has provided important opportunities to expand the use of the currency， as developing economies along the routes are thirsty for capital， imports and exports， according to Zhang.

Meanwhile， progress has been made in opening up the onshore financial market， and space has been created for the crossborder use of the yuan， said Zhang.

In order to synchronize with the inclusion of the yuan in the IMFs special drawing rights basket， the PBOC has put forward a series of policies to improve the connections between domestic and overseas financial markets， such as launching the bond connect and stock connect programs between the mainland and Hong Kong.

During British Prime Minister Theresa Mays visit to China from January 31 to February 2， Chinese Premier Li Keqiang revealed Chinas preparations for the establishment of the Shanghai-London Stock Connect， expected later this year.

Chinas crude oil futures， to be launched on March 26， will also boost the yuans global use. The yuan-denominated oil contract means that the Chinese currency will play a greater role in trade between China and oilproducing countries.

“Against the foil of low interest rates in the global market， the relatively high returns on yuan-denominated assets will attract more global funds into the domestic capital market， which will allow the yuan to play a larger role as a reserve currency，” said Zhang.

According to Zhang， further exploration into the offshore fi nancial market will provide more channels for the yuan to fl ow globally. As international financial cooperation continues and the yuan settlement mechanism and the arrangement of bilateral currencyswap agreements make steady progress， and as offshore yuan settlement upgrades and transforms， offshore market players will be more actively engaged in innovating yuan products， he said.

“Hong Kong should play the role of pivot in order to roll out Chinas network of offshore yuan centers and the associated network of fi nancial institutions， which is important to achieve internationalization，” said Xu.

Sun believes that a vital factor for the yuans internationalization is Chinas economic fundamentals.

“Reviewing the internationalization process of other currencies， such as the U.S. dollar， British pound and Japanese yen， you will fi nd it was subject to GDP growth， foreign trade， infl ation and the development of the respective fi nancial markets，” he said.

Sun added that one prerequisite for the yuans internationalization is the opening up of capital accounts， because there will be a huge demand from overseas yuan holders to invest in yuan-denominated assets.

Xu agreed that the future of the currencys internationalization lies in the further opening up of Chinas capital accounts， along with realizing free convertibility.

“Right now the necessary conditions are still not in place， so full opening up at this stage may lead to massive cross-border capital fl ow， which justifi es the strengthening of regulation by the Chinese authorities，” said Xu.endprint