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China is pushing for global use of the yuan to mitigate the impact of possible Western sanctions.
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It should protect against sanctions in scenarios such as a military conflict over Taiwan, says one researcher.
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However, the use of a larger number of yuan poses a challenge for China’s trading partners.
China is seeking to expand the use of the yuan internationally, but one researcher says Beijing’s short-term intentions are more about protecting itself from sanctions than about the dominance of its currency.
“China’s strategies for developing an alternative financial system are defensive rather than offensive – at least for now,” Zoe Liu, a China scholar at the Council on Foreign Relations, wrote on Wednesday.
Liu wrote that Beijing’s aim was to minimize the impact of possible comprehensive sanctions from the West in “extreme geopolitical scenarios such as a military conflict over Taiwan,” which China claims as its territory. Her post was published on the website of the Official Monetary and Financial Institutions Forum, a London-based think tank.
“Expanding the use of the renminbi in trade is less challenging than strengthening its status as an international reserve currency,” Liu wrote.
Around the globe, countries are diversifying their assets and weakening the dominance of the US dollar, fearing that, like Russia, they could be locked out of the global financial system based on the US currency if sanctions are imposed.
However, the dollar is so deeply rooted in the global financial system that few really believe it can be dethroned.
The Yuan faces challenges in its globalization
While the strategic competition between the US and China points to a possible race for currency dominance, the Chinese yuan is far from ready – and even Beijing knows it.
One oft-cited obstacle to the internationalization of the yuan is the capital controls that China uses to maintain its financial stability. This means that Beijing has control over how much foreign money can flow in and out of the Chinese economy, which in turn affects the exchange rate of the foreign currency.
However, Liu wrote that capital controls are not necessarily an obstacle to wider adoption of the yuan in trade.
““China is already a major trading partner for over 120 countries and the Chinese government is ready to facilitate exports by offering currency swaps and providing trade finance,” she said.
But the yuan’s path to becoming an international reserve currency is riddled with obstacles due to other factors. Among those cited by Liu are the lack of risk-free yuan-denominated assets, the more closed nature of China’s financial market and Chinese leader Xi Jinping’s preference for one-man rule over a rule of law.
Companies have reservations about using the yuan
Current data from the Chinese central bank show that even Chinese companies are not particularly convinced of the yuan and are reluctant to convert their foreign exchange earnings into the Chinese currency.
This seems to be primarily due to the current weakness of the Yuan. It also shows that it is not so easy to displace the mighty US dollar as the world’s most important reserve and trading currency.
A recent global survey of around 1,660 companies found that there is simply not enough interest in using the yuan for trading.
The survey, conducted in March by the China Bank of Communications and Renmin University, found that about three-quarters of participants lived in East Asia, with another fifth of respondents from Southeast Asia and Central Asia.
Half of the companies surveyed said that the biggest obstacle to wider use of the yuan is simply that their trading partners are unwilling to use this currency.
About 64 percent of all respondents said that complex policies were the biggest obstacle, and over 40 percent cited compatibility of laws and regulations and obstacles to capital flows as the biggest difficulties.
Read the original article on Business Insider
