Trump’s policies make a fully convertible yuan by 2020 impossible, say financial experts
Industry watchers say a stronger dollar and Beijing’s strict capital controls will slow the pace of internationalising the Chinese currency
The US president’s economic policies including major tax reforms and interest rate rises aimed at boosting the American economy are likely to strengthen the US dollar against other currencies including the yuan. And that may slow down the process of internationalising the Chinese currency, explains Aidan Yao, senior emerging Asia economist at AXA Investment Managers.
“A stronger US dollar would lead to depreciation of the yuan, which would create an adverse effect on the internationalisation of the currency. A fall of the yuan against the US dollar, such as what we saw in 2015 and 2016, makes investors less interested in buying dim sum bonds. China would also need to bring in measures to restrict capital outflows.”
The yuan’s 7 per cent slide against the US dollar in 2016 sparked a tide of funds leaving the mainland as individuals and companies ploughed money into insurance policies, properties, stocks and other assets in Hong Kong and overseas to hedge against the falling currency.
These measures stemmed the outflows and strengthened the yuan but also slowed the pace at which it was allowed to become a freely traded currency in the international market.
As such, Trump’s policies would make it difficult for Beijing to achieve its goal for the yuan to become fully convertible in two years’ time, Yao explained.
John Woods, managing director and chief investment officer Asia-Pacific at Credit Suisse, said he believed China would not be able to meet the 2020 target. He said 2030 was a more realistic target.
Speaking at the China Conference at Hong Kong’s JW Marriott hotel, Woods said the PBOC’ s numerous measures to control capital outflows had prevented the currency becoming a free-flow currency internationally.
“It is not going to happen any time soon,” he said.
China started the process of liberalising the yuan 15 years ago by gradually allowing Hong Kong banks to conduct yuan deposit and remittances business. This was later expanded to allow international investors to use the yuan to settle trade and investment transactions. In November 2015, the State Council indicated it would like to see the onshore yuan as an international freely tradeable and usable currency by 2020.
Woods, who has a column in the Post, has written that the yuan’s convertibility would not happen before 2030.
“I might have been having a particularly bad day when I first wrote that,” he quipped.
Newman agreed, saying full convertibility would not happen by that time “even on a good day”.
Speaking at the same forum, he said even 2030 as a deadline for the yuan to achieve full convertibility “seems too optimistic.”
AXA’s Yao believes the yuan could become more widely uses internationally as a trade settlement currency because of the fact it is the world’s second largest economy and has a lot of trade partners.
“However it’s a long way from being used in international financial markets as an investment currency because the US dollar is dominant in a lot of investment assets worldwide,” he added.