So much of policy coming out of Beijing these days seems contradictory, especially where financial matters are concerned.
On the one side, China’s leadership has all but shut down avenues for the country’s businesses to procure foreign capital, in particular any ability of Chinese firms to float public offerings in the United States. But at the same time, the authorities, after years of keeping foreign financial firms out of China, have invited America’s BlackRock to build, sell, and administer mutual funds in China. Without naming them, Beijing is inviting other foreign financial firms to do the same. If from some perspectives this sort of behavior seems inexplicable, it nonetheless does seem reasonable in one important regard, and that is Beijing’s long-held desire to make the yuan a global reserve currency and perhaps someday supplant the dollar as the premier international currency.
Beijing has made no secret of its ambitions for the yuan. It has used China’s predominance in trade to advance this objective as well as the political advantages gained through the Belt and Road Initiative (BRI, also known as “One Belt, One Road”). In some instances, Beijing has insisted that trading partners write contracts in yuan instead of the usual dollar-based accounting. Although the yuan has made gains over the five years or so since the International Monetary Fund (IMF) first accepted the currency as part of the basket by which it creates its special drawing rights for central bank accounting, the yuan still has a long way to go to overtake the dollar.
According to a recent IMF accounting, only some 2 percent of global currency reserves are held in yuan compared with over 60 percent in dollars. To be sure, several global financial firms have forecast further gains for the yuan. Morgan Stanley projects that the yuan’s share in global reserves will rise to 5 percent or more by 2030. That would constitute a remarkable stride, but it would still leave the yuan less significant than the euro, even sterling, and still far from supplanting the dollar. Other gauges, such as the percent of trade contracts written in various currencies, tell the same story.
Even as the country’s leadership in Beijing voiced its yuan ambitions and must enjoy forecasts such as Morgan Stanley’s, it surely has long known that as things stand presently, matters can only go so far. Pointedly, Chinese finance, as it is currently structured, lacks what it needs to support a global currency. The need to develop that support seems to lie behind Beijing’s latest moves.
A reserve, for instance, demands liquid currency markets. Before traders, investors, bankers, and central bankers will rely on a currency for international dealing, they have to be sure that they can move into and out of it quickly and easily, and do it anywhere in the world at almost any time. Take an exporting company paid in a global reserve not its own. To meet its payroll and its obligations to suppliers, it must have the ability to change quickly from the currency in which it is paid to the one needed to meet these obligations. China has not only lacked the necessary currency trading facilities and expertise, but it also had controls on money flowing into and out of the country, and still does.
Similarly, China has also lacked sufficient yuan-based investment instruments to support its currency in a global role. These are critical because people all over the world must hold balances in any currency that serves as a reserve and as an international trading vehicle. To satisfy their needs, the nation issuing such a currency must offer an array of investment vehicles—accounts to be sure but also ways to earn on balances held for both short- and long-term time frames. China had and still offers little more than stock markets, underdeveloped bond markets, and low-interest accounts at state-owned banks. Without more, few would want to hold yuan balances.
For a time, Beijing might have looked to Hong Kong’s impressive financial expertise and facilities to fill these needs and enable the yuan to step up to a premier international role. But it seems that internal political needs have trumped that ambition. The crackdown in Hong Kong has already begun to drive its impressive international banks and financial institutions to Singapore and points beyond. Much expertise is leaving with those institutions and with individuals who no longer want to remain in Hong Kong in the new circumstances. With these strengths clearly ebbing, Beijing has had to seek another solution. Both these seemingly contradictory moves are surely meant to serve that purpose.
Take the decision to cut Chinese business off from foreign sources of capital. In the present, the shortfall in money flows might work against growth prospects, but over time, it will create pressure on existing financial arrangements to develop vehicles that can raise funds for the businesses cut off from foreign capital. Responding to such demands will also develop the kinds of investment vehicles that could also satisfy the needs of those who would have to hold yuan balances and help it become a global reserve currency. The more thoroughly those facilities develop, the greater the chance that the yuan will rise in global stature.
The decision to invite BlackRock and other foreign financial operations into China would complement such an effort. Not only would BlackRock and these others develop the needed investment vehicles—bond funds and short-term investment funds as well as equity funds—but it would bring into China trading expertise and systems that the yuan also needs to support it as a global currency. These firms would also serve as models for Chinese counterparts to acquire that expertise for themselves.
Whether these efforts will give the yuan the status Beijing wants remains an open question on several levels. It is, for instance, not apparent that these moves and others like them will transform Chinese finance sufficiently to compete with what Singapore, Tokyo, London, and New York already offer in abundance, for their own currencies and for the dollar. Nor is it apparent that the government in Beijing, with its love of centralized control, can tolerate the experimentation and freedom of action needed to create the required financial environment.
And even if Beijing’s steps succeeded completely, the rise in the yuan is far from guaranteed. In addition to trading and financial depth, should it develop, much behind a global currency also depends on practice, habit, and custom. Having held the role of premier global reserve currency for over 70 years, the dollar has much of this in its favor. That does not ensure that it will hold its position indefinitely, but it does mean that the transition would take a very long time, long enough to try even the famed patience of the Chinese.
