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China renews push for increased global role for Yuan

(Bloomberg) –

Given the opportunities for limited access to US dollars, China’s response is to get more people to use their own currency instead.

The growing transition of Sino-American tensions into the financial sphere has ignited a new impetus from China to promote the global use of the yuan. A growing number of government officials and influential market watchers have in recent weeks called for greater efforts in pursuit, which gained renewed significance after China̵

7;s new security law in Hong Kong triggered the threat of retaliation from Washington.

While such a drastic measure is far from being implemented by the United States – and could potentially do major damage to US interests and the entire global financial system – the risks have only raised alarm bells. With nearly $ 1 trillion in offshore bonds and loans and $ 1.1 trillion in state bank obligations, access to greenback is crucial for Chinese companies and lenders.

“The yuan internationalization changed from a desirable to an indispensable thing for Beijing,” said Ding Shuang, chief economist for Greater China and Northern Asia at Standard Chartered Plc. “China needs to find compensation for the dollar amid political uncertainty, otherwise the nation will see financial risks.”

Similar demands to move away from the dollar followed the financial crisis in 2007-09. While China has made some progress over the years – promoting yuan trade offshore, gaining official reserve currency status from the International Monetary Fund and launching commodity contracts priced in yuan – renminbi is a small player on the global stage.

The yuan’s share of global payments and central bank reserves is still low, at around 2%. And while the steady opening of China’s financial markets to foreign investors has attracted inflows, foreign ownership of mainland stocks and bonds is relatively small.

Among the latest voices expressing urgency in China:

Fang Xinghai, a senior official with China’s securities regulator, said last month “our ability to defend against potential decoupling will be greatly enhanced” through the yuan internationalization. Huang Yiping, a former adviser to the central bank, said it was necessary for the country to reduce its reliance on the greenback. Zhou Li, a former deputy director of a government agency that manages relations with foreign parties, decorated China’s vulnerability to “dollar hegemony” and said the greenback is a major risk that “has us in the throat.”

Zhou Yongkun, an official at People’s Bank of China, said last week that the country will introduce direct trade between the yuan and additional currencies, without specifying which ones.

In order to accelerate to a level of equivalents such as the yen or the euro, China would need to reduce its capital controls, which were tightened as a result of a devaluing devaluation in 2015. But it would increase the risk of destabilizing outflows. Alternatively, China could expand imports and drive sustained current account deficits – as the US does – to generate a pool of yuan balances abroad. This, too, requires a hard time to imagine political change.

“Yuan globalization is largely linked to capital account convertibility – which China is not yet ready for,” said Yu Yongding, a former adviser to People’s Bank of China. “China faces a serious challenge to a series of potential US financial sanctions, and we cannot even rule out the possibility of freezing China’s financial assets one day. I think the regulators have a contingency plan. “

What is unclear is how hard the Trump administration is prepared to push. Relocations to limit a state pension fund from investing in Chinese equities are already underway, along with a closer look at Chinese companies’ listings on US stock exchanges. But systematically limiting access to the world’s second-largest economy to dollar financing and transactions would be an unprecedented step since the United States tolerated unregulated use of its currency abroad in the 1960s.

Chinese regulators are building China’s international payment system to settle transactions outside the dollar-based platforms where the United States stays. Hong Kong, which supplies about half of the world’s offshore yuan liquidity, also aims to become a more prominent yuan trading center.

Hong Kong’s regulatory authorities last month launched Wealth Management Connect, which enables cross-border investment among Hong Kong, Macau and southern China residents. The move has consequences including increasing the yuan’s international use and testing capital account opening, analysts have said.

Stronger steps could include China insisting on paying for some imports in the yuan, making direct investments abroad in the yuan and providing loans in the official name of the renminbi currency. The fact that more than half of Hong Kong’s bank deposits are denominated in foreign currency (led by the US dollar) and Chinese banks themselves have about $ 747 billion in foreign currency deposits suggests a sustained demand in major China for greenbacks.

The yuan on land rose 0.05% to $ 6,9968 from $ 1:51 in Shanghai on Monday, near the strongest since March.

“It is not possible for China to have a marked internationalized currency as it stands today,” said George Magnus, research assistant at Oxford University’s China Center and author of “Red Flags: Why Xis China Is in Jeopardy.”

With a global yuan still years or decades away, what is left to China in the meantime may be the threat of countermeasures and highlight the global consequences of the most extreme US action. Chinese banks and offshore bonds have become important cogs in the world system.

“Turning off the banking system’s funding in US dollars would be a serious blow – for that reason I don’t expect it to happen” to China, says Magnus.

(Adds the yuan’s Monday trading in the fourth to last paragraph)

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