De-dollarization: China wants more CNY trade for fears of sanctions
De-dollarization: China wants more CNY trade for fears of sanctions
De-dollarization Efforts by China
Strategic Protection Against Sanctions
China is promoting the use of the yuan globally, primarily to shield itself from potential Western sanctions, especially in scenarios like a military conflict over Taiwan.
Challenges in Yuan Globalization
While China encourages the use of the yuan in international trade, its path to becoming a major reserve currency faces obstacles like capital controls and the closed nature of its financial markets.
Businesses Hesitant to Adopt Yuan
Despite governmental efforts, many Chinese and international businesses are reluctant to switch to the yuan, citing its current weakness and lack of global trust and acceptance.
What are the implications of China's capital controls on the yuan's internationalization, and how does Beijing manage these controls to foster trade?
Capital controls, which refer to the measures that restrict the movement of foreign capital into and out of China, have significant implications on the yuan's internationalization1. These controls, while helping Beijing maintain financial stability, also limit the yuan's global adoption as they give the government control over foreign money movement in and out of the Chinese economy, thereby influencing foreign currency exchange rates1.
Despite these controls being seen as a hurdle to the yuan's internationalization, they aren't necessarily a dealbreaker. As stated by Zoe Liu, a fellow for China studies at the Council on Foreign Relations, China's status as a top trading partner for over 120 countries allows room for the Chinese government to facilitate exports by offering currency swaps and providing trade finance. This approach helps Beijing manage capital controls in a way that fosters trade.
However, the yuan's journey to becoming an international reserve currency is still challenged by several factors. These include the lack of risk-free yuan-denominated assets, the somewhat closed nature of the Chinese financial market, and the preference of China's leader, Xi Jinping, for one-man rule rather than the rule of law. Recent data from China's central bank also shows that even Chinese businesses aren't entirely sold on the yuan, as they hold back on converting their foreign-exchange earnings into the Chinese currency, primarily due to the yuan's current weakness.
In summary, while capital controls pose certain challenges to the yuan's internationalization, they also provide Beijing with tools to manage and foster trade1. However, the yuan's path to becoming a global reserve currency is still fraught with obstacles.
What obstacles does the yuan face in becoming an international reserve currency, as mentioned by Zoe Liu?
Zoe Liu, a fellow for China studies at the Council on Foreign Relations, mentioned several obstacles that the yuan faces in becoming an international reserve currency. These obstacles include:
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The lack of risk-free yuan-denominated assets: This refers to the absence of safe and secure financial instruments denominated in yuan that can be held by central banks and other financial institutions as a store of value.
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The somewhat closed nature of the Chinese financial market: China's financial market is not fully open to foreign investors, and there are restrictions on capital flows in and out of the country. This can make it difficult for the yuan to be widely used and traded in international markets.
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The preference of China's leader, Xi Jinping, for one-man rule rather than the rule of law: This refers to concerns about China's political stability and the rule of law under Xi Jinping's leadership. Investors may be hesitant to hold large amounts of yuan-denominated assets if they have concerns about the stability and predictability of China's political and legal system.
Despite these challenges, Liu notes that expanding the use of the renminbi in trade is less challenging than increasing its status as an international reserve currency. China's position as a top trading partner for over 120 countries and the Chinese government's willingness to facilitate exports through currency swaps and trade finance could help to increase the use of the yuan in international trade.