The Impact of the Yuan on China’s Economy

Chinese policymakers are moving toward the internationalization of the Yuan, amid growing worries about the country’s exposure to the fiscal woes of the United States and the U.S. dollar’s role as the global reserve currency (Zhang and Tao, 2014). The first would be to decrease the country’s reliance on the U.S. dollar, which he suggested should no longer be considered a safe haven following the near-collapse of the American financial system in 2008. The second goal would be to stabilize the international financial system by creating another major currency where investors could put their money in times of crisis. China definitely wants, as all countries do, the ability to fend off external volatility, external shocks. A three-currency world is much more stable than a two-currency world. Taking the Yuan into a major international currency is the next step in confirming the country’s new status as an economic and diplomatic power (Blitz and Lockett, 2017). But a world in which the Yuan is a major trading currency would necessarily look quite different from the one dominated by the U.S. dollar, forcing both the United States and China to confront the imbalances in their domestic economies. The Yuan would be used to price more international contracts. China exports a lot of commodities that are traditionally priced in U.S. dollars. If they were priced in Yuan, China would not have to worry so much about the dollar’s value. All central banks would have to hold Yuan as part of their foreign exchange reserves. The Yuan would be in higher demand. That would lower interest rates for bonds denominated in Yuan. Chinese exporters would have lower borrowing costs (Dobson and Masson, 2009). China would have more economic clout in relation to the United States. It would support President Jinping’s economic reforms.

Role foreign banks and electronic platforms in moving Yuan to a global currency

Both HSBC and Thomas Reuter have a global presence and have an ability to get the Yuan into the floating exchange system against the US dollar and the Euro (Zhang and Tao, 2014). The foreign banks are responsible for transactions in different world currencies. China, just like other countries in the world, is dependent on banks such as HSBC to provide Yuan with an international boost and start to accept worldwide transactions in it (Dobson and Masson, 2009). China wants its Yuan to be recognized more in the global market than the competitors that include USD and Euro. Electronic platforms such as Thomas Reuter are helpful in making sure that the Yuan becomes an international currency and there is an achievement of success in the expansion of Yuan’s offshore access. Due to an increase in electronic trading through online transactions, Yuan will ultimately emerge to become the world’s leader as a result of the tremendous growth of China’s exports.

China’s exchange rate and impact on FDI

As China competes with other developing countries for global FDI, the devaluation of Yuan and pegging to the dollar policy unambiguously enhanced China’s comparative advantage in production costs and made China an ideal place for global outsourcing of MNEs (Zhang and Tao, 2014). Yuan’s cumulative devaluation created substantial wealth and production effects, leading to the surge of Japanese direct investment in China. The real exchange rate is one of the significant determinants of Japanese FDI in China. The appreciation of RMB will decrease FDI. The IMF announced that RMB is part of the SDR (Special Drawing Right). The SDR is an international reserve asset (Dobson and Masson, 2009). The devaluation not only offsets the rising wage pressure due to sustained economic growth but also strengthened China’s competitiveness in attracting global FDI. The appreciation of the yuan will undermine China’s competitiveness in attracting export-oriented FDI. The slowdown of export-oriented FDI will, in turn, weaken China’s export growth, which has been one of the growth engines for the Chinese economy. Considering the unemployment pressure and weak domestic demand faced by the Chinese economy today, it is too early to let Yuan appreciate.

Restrictions by the government on free trade

The Chinese government wants to limit the cross-border flow of goods by raising customs fees and import taxes. There are import duties and taxes related to foreign trade and business. Anti-dumping and countervailing duties may be imposed on imported goods that pose a threat to Chinese national industries. Imported agricultural products subject to tariff rate quotas include wheat, corn, rice, soybean oil, rapeseed oil, palm oil, sugar, cotton and wool. Ozone-depleting substances and key used mechanical and electronic products are subject to quota and licensing control (Zhang and Tao, 2014). China adopted the practice of “quarantine inspection before customs declaration” in customs clearance. China implemented its new system of compulsory product certification for all import and export goods.

Use of Chinese Yuan in global transactions

Despite the growing importance of China in the global economy and the various strategic measures put in place by China to support its currency, RMB usage remains low and the pace of adoption remains lower than expected (Zhang and Tao, 2014). The RMB share as international payments currency is 1.61 percent when looking at domestic and cross-border payments. The activity share is lower (0.98 percent) if looking at cross-border payments only and excluding intra Eurozone payments. Twenty-two Chinese banks are on SWIFT gpi, making RMB payments faster, transparent in terms of fees, and fully traceable. 97.08 percent of RMB trading is against the USD and there is no substantial liquidity in any other RMB pair (Blitz and Lockett, 2017). China’s hopes of achieving global acceptance for the Renminbi have been set back by data showing the share of international transactions in its currency at its lowest level in more than three and a half years.

References

Blitz, R. and Lockett, H. (2017). Renminbi global transactions share at multiyear low. The Financial Times.

Dobson, W. and Masson, P.R. (2009). Will The Renminbi Become A World Currency? China Economic Review, 20, 124-135.

Zhang, L., and Tao, K. (2014). The Benefits and Costs of Renminbi Internationalization. ADBI Working Paper 481. Tokyo: Asian Development Bank Institute.