Yuan to act as global currency ‘anchor’: Chinese finance expert
BEIJING — China is forecast to overtake the U.S. as the world’s largest economy as early as 2030 and is striving to raise the international stature of its currency to a level befitting the country’s economic might. As part of its effort, China is stepping up its promotion of central bank digital currencies.
Sun Lijian, a professor of finance at China’s Fudan University, contends that the dollar is losing its ability to serve as an anchor for other currencies because of its volatility in the currency market. In a recent interview with The Nikkei, Sun said, “If the dollar alone cannot perform the role of an anchor, the renminbi (yuan), along with the Japanese yen, can also assume the responsibility as a stabilizing factor in the international currency system.” But he also emphasized that he does not believe that the yuan will replace the dollar as the predominant world currency.
Sun predicts that cross-border transactions in the yuan will grow through free trade zones in China and the Belt and Road Initiative, a massive international infrastructure building drive led by Beijing. He also argues that promoting the digital economy will help raise the international status of the yuan.
Edited excerpts of the interview follow.
Q: The COVID-19 pandemic has led to radical changes in the global economic landscape, including those related to the currency market. What are the implications of these changes?
A: The pandemic has raised afresh an old issue. Because the value of the dollar, the dominant international currency, fluctuates wildly, the value of foreign reserves of creditor nations such as China and Japan also move up and down sharply.
In the past, the dollar was a global public good with the ability to stabilize the values of various currencies just like gold. But the U.S. has allowed its currency to stop playing this role and has begun to prioritize domestic policy challenges. Changes in the value of the dollar could damage the interests of other countries. China wants to avoid such damage to its national interests.
Q: Yuan-denominated transactions have grown in recent years, especially in Asia and Africa. What is fueling that growth?
A: Sharp changes in the value of the dollar are increasing the costs of trade and investment. That could threaten the stability of financial systems in emerging countries. It is necessary to establish a new anchor to stabilize the value of currencies.
Let me emphasize this: We do not believe at all that the renminbi will someday replace the dollar as the predominant world currency. If the dollar alone cannot perform the role of an anchor, the renminbi, along with the Japanese yen, can also do the job, acting as a stabilizing factor in the international currency system.
Q: How do you see the future of the yuan? Will it become a major international currency?
A: The internationalization of the renminbi will depend on how China promotes market economy principles through the reform and liberalization of its financial markets. Cross-border transactions in the renminbi will increase through domestic free trade zones and the Belt and Road Initiative.
Japan once tried to internationalize the yen, but mainly through the government’s official development assistance program. Its aid to other countries alone was not sufficient to internationalize the currency. Even Japanese global companies have mostly continued using the dollar for their international transactions, as they have understood that the internationalization of the yen has reached its limit. Progress in the internationalization of the renminbi will depend on the growth of its use in international transactions in markets.
Q: That would require China to ease further or even eliminate restrictions on foreign access to its financial markets. Is Beijing ready to do so?
A: The opening of China’s financial markets to foreign capital needs to be consistent with efforts to stabilize the currency. One major worry is the possibility that swift liberalization of [China’s] financial markets could lead to a situation where U.S. interest rate hikes trigger rapid outflows of foreign funds from the Chinese government bond market and cause serious turmoil in the country’s financial system.
Q: Will the spread of digital payments boost the use of the yuan globally?
A: It is a tall order to challenge the dollar for world hegemony in the existing financial networks. That is why China has its sights set on the growth potential of the digital economy. That will be a boon to China’s efforts to raise the international status of the renminbi.
The digital economy has sharply reduced transaction costs. That means low-income earners can buy more goods and services with the same income. There is a lot of latent demand for goods and services among low-income earners in developing countries. That is why China is promoting the use of QR codes for payments in the renminbi under its Digital Silk Road initiative. China is also benefiting from its massive investment in the distribution network underpinning the digital economy as part of its policy response to the economic downturn following the collapse of Lehman Brothers (in 2008).
Q: Will the digital renminbi give China a leg up in its quest to grab the leadership in global payment networks?
A: Leadership is not something you can obtain by pursuing it. It will come through constant efforts to promote market principles, including the reform and liberalization of financial markets. That is also true with the dollar, the predominant currency at present. Strong U.S. economic growth and the high liquidity of U.S. government bonds have raised the share of the dollar in international payments, and as a result the U.S. has become the leader in the international financial system. It did not happen because the U.S. desired it.