China’s yuan strategy is not paying off with trade partners, survey finds, as ‘policy and market risks are uncontrollable’
- Latest Cross-Border Yuan Insight report suggests that Beijing’s efforts to challenge US dollar hegemony still face considerable hurdles
- From fluctuations in the yuan exchange rate to impediments in cross-border capital flows, it is not easy to convince trade partners to settle in the yuan
Despite Beijing’s determination to boost overseas use of China’s currency, fresh survey findings indicate that an “unwillingness among trading partners to use the yuan” remains the biggest obstacle to cross-border trade settlements.
About 47.7 per cent of surveyed enterprises said the lack of interest among trading partners to use yuan was the main hindrance to its proliferation, according to the first-quarter Cross-Border Yuan Insight report – the results of which were jointly released on Monday by the Bank of Communications, China’s fifth largest bank by size, and Renmin University’s International Monetary Institute think tank.
Among respondents, around one-third of them said the difficulty level remained unchanged from a year prior, while about 11 per cent believed it had worsened.
A total of 1,657 companies were surveyed in March. Approximately 71 per cent are private businesses, 13 per cent are state-owned enterprises, and 15 per cent are foreign-funded enterprises.
The findings reflect the challenge Beijing is facing is trying to turn the yuan in a global currency capable of challenging the US dollar’s global hegemony that affords Washington considerable power in imposing crippling sanctions and waging other forms of financial warfare.
The yuan’s internationalisation index, as measured by China’s central bank, has considerably improved since 2009, but it still lags far behind the dollar and the euro in terms of trade settlement, international payments, forex trading and central bank forex reserves.
The new survey found that other obstacles included fluctuations in the yuan exchange rate, interest-rate differentials between the yuan and foreign currencies, and hurdles to cross-border capital flows.
More than 63.84 per cent of respondents cited the “complexity of policies” as the main obstacle, and more than 40 per cent said difficulties lie in the “compatibility of laws and regulations” and “capital-flow barriers”.
Nearly 30 per cent cited the yuan’s “limited investment scope”, while about 20 per cent pointed to the “lack of hedging tools”.
George Lu, an operations director at a European medical device company in the Yangtze River Delta, said many original equipment manufacturers (OEMs) will take payments in dollars from their overseas headquarters, then convert that money to yuan to pay for production and operation costs. Any surplus yuan is then held in Chinese bank accounts.
“The yuan-denominated figure in our bank account is used only for short-term wealth-management products, then converted back to US dollars when the exchange rate is good,” he said.
“We are not considering other yuan business for the time being, because the policy and market risks are uncontrollable.”
Kent Liu, a Guangzhou-based digital-printing producer with factories in both the Americas and Southeast Asia, said: “Southeast Asian customers are more likely to settle in yuan, but most of them are mainly of Chinese backgrounds. Customers in other overseas markets currently prefer to settle in dollars, because the yuan is still not very useful for investing in their countries.”
The survey showed that most respondents were engaged in cross-border trade settlements in the yuan, or in yuan-related foreign exchange trading.
However, less than a quarter of them conducted offshore yuan trade financing, yuan deposits or yuan-denominated wealth-management businesses.
Regarding their plans for the second quarter, just under 80 per cent of the firms had no plans to increase their yuan settlements; nearly 10 per cent planned to increase such settlements by up to 10 per cent; 9 per cent planned to increase the amount by 10 to 50 per cent; and only 2 per cent planned to increase the amount by 50 to 100 per cent.
The report concluded that a global rise in economic and political uncertainties, heightened volatility in international financial markets, rising geopolitical risks, and intensified Sino-US trade frictions all had a major impact on cross-border yuan settlements.
It urged authorities to make greater efforts to simplify cross-border yuan-settlement processes, reduce transaction costs, and support cross-border yuan settlements for new foreign trade businesses, while also enhancing the financing currency function and promoting the currency’s use in trading major commodities such as oil, gas, and iron ore.
US Fed’s ex-risk expert flags inflation worries and suggests how China can tackle economic obstacles
- Carl Tannenbaum discusses when and how the US may cut interest rates, and why he is concerned about long-term effects from tensions and supply-chain upheavals
- As China contends with weak spending and low inflation, breaking the cycle will not be easy if people expect economic woes to continue
Expectations that a US interest rate cut will be delayed to later this year – or perhaps even to 2025 – continue to heap depreciation pressure on emerging-market currencies, including China’s yuan.
And the large interest-rate differential between Western countries and China is making it difficult for the People’s Bank of China (PBOC) to keep the yuan aligned with their targets while being mindful of greater capital-outflow risks, according to Carl Tannenbaum, who was the US Federal Reserve’s risk manager during the global financial crisis.
Now the chief economist at financial services firm Northern Trust, Tannenbaum said the earliest US rate cut could take place in September, but inflation remains a decisive factor, and there must first be sustained evidence showing a drop in prices for the central bank to ease up on interest.
“I worry a little bit about the long-term impact of inflation from some of these changes we’re seeing globally on supply chains and the increase in geopolitical tension,” he said. “The level of globalisation is clearly lower than it was 15 years ago.”
A report by the US-based International Monetary Fund in April warned that while overall inflation pressure had eased from its highs, volatility in oil prices, service inflation, and trade restrictions on Chinese exports could also push up goods inflation.
Unlike in many parts of the world, inflation rates in China have been low, and there have been expectations from investors that the PBOC may cut interest rates to boost weak credit demand.
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“Spending in the economy is going to be slow, and if the economy’s going be slow, you’re going have low levels of inflation and interest rates. And breaking that cycle – once people start to expect that it will continue – it’s hard to do,” Tannenbaum said.
In particular, prolonged low inflation and a low-interest-rate environment would be very problematic for pension systems and insurance companies, he added.
China’s producer price index – which measures the cost of goods at the factory gate – declined for the 19th straight month in April, with a year-on-year drop of 2.5 per cent, after a fall of 2.8 per cent in March.
China’s consumer price index (CPI), a key gauge of inflation, grew in April by 0.3 per cent, year on year, after an increase of 0.1 per cent in March.
US demand, on the other hand, has been buoyed by large public expenditure plans, including the US$1 trillion infrastructure bill and the US$430 billion US Inflation Reduction Act initiated by the administration of President Joe Biden.
The Inflation Reduction Act contains various tax credits and other subsidies to incentivise companies to deploy more clean-energy projects, while the infrastructure bill directs US federal funds into highways and transit programmes.
The US budget deficit as a percentage of its gross domestic product has been estimated to be around 5.5 per cent this year, compared with 3 per cent in Europe.
China, meanwhile, has been reluctant to significantly increase its fiscal spending this year, thus far relying mainly on exports for growth.
Tannenbaum suggested that a large government spending package and a restructuring of national debt would help China tackle its economic problems that have shown similarities to Japan’s in the 1990s.
“China has been very effective in stimulating the supply side of their economy. This may end up being counterproductive, because it would continue to invite accusations, true or not, that they’re selling below cost,” Tannenbaum said.
Tannenbaum added that it is also imperative for China to invest more in artificial intelligence to help boost productivity as its population is set to age faster than expected, which is expected to shrink its labour force.
“For China, the race to be a leader in AI is not just an industrial policy. It’s also a recognition that, inside of China, they need the efficiencies that are going to come from those computing techniques.”