The yuan will play the role of “anchor” of the world currency: a Chinese financial expert
BEIJING – China is expected to overtake the United States as the world’s largest economy as early as 2030 and is striving to raise the international stature of its currency to a level worthy of the country’s economic strength. As part of its efforts, China is stepping up its promotion of central bank digital currencies.
Sun Lijian, professor of finance at China’s Fudan University, argues that the dollar is losing its ability to serve as an anchor for other currencies due to its volatility in the currency market. In a recent interview with the Nikkei, Sun said, “If the dollar alone cannot act as an anchor, the renminbi (yuan), as well as the Japanese yen, can also take responsibility as a factor. stabilization of the international monetary system. “But he also stressed that he didn’t think the yuan would replace the dollar as the predominant world currency.
Sun predicts that cross-border yuan transactions will grow thanks to China’s free trade zones and the Belt and Road Initiative, a massive international infrastructure-building campaign led by Beijing. He also argues that promoting the digital economy will help raise the international status of the yuan.
Edited excerpts from the interview follow.
Q: The COVID-19 pandemic has brought about sweeping changes in the global economic landscape, including those related to the currency market. What are the implications of these changes?
A: The pandemic has again raised an old problem. Since the value of the dollar, the dominant international currency, fluctuates greatly, the value of foreign exchange reserves of creditor countries like China and Japan also fluctuates greatly.
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 United States let its currency cease to play this role and began to prioritize domestic policy challenges. Changes in the value of the dollar could harm the interests of other countries. China wants to avoid such damage to its national interests.
Q: Transactions denominated in yuan have increased in recent years, especially in Asia and Africa. What is fueling this growth?
A: Sudden changes in the value of the dollar increase the costs of trade and investment. This 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 stress this: we do not believe at all that the renminbi will ever replace the dollar as the predominant world currency. If the dollar on its own cannot act as an anchor, the renminbi, along with the Japanese yen, can also do the job, acting as a stabilizing factor for the international monetary 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 renminbi transactions will increase thanks to national free trade zones and the Belt and Road initiative.
Japan has tried to internationalize the yen in the past, but mainly through the government’s official development assistance program. Its aid to other countries was not sufficient to internationalize the currency. Even Japanese global companies for the most part continued to use the dollar for their international transactions, as they realized that the internationalization of the yen had reached its limits. Progress in the internationalization of the renminbi will depend on the growth of its use in international market transactions.
Q: This would force China to further ease, if not eliminate, restrictions on foreigners’ access to its financial markets. Is Beijing ready to do it?
A: The opening of Chinese financial markets to foreign capital must be consistent with efforts to stabilize the currency. One of the main concerns is the possibility that rapid liberalization of [China’s] financial markets could lead to a situation where US 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 around the world?
A: It is a tall order to challenge the dollar for global hegemony in existing financial networks. This is why China is aiming for the growth potential of the digital economy. It will be a boon to China’s efforts to raise the international status of the renminbi.
The digital economy has greatly reduced transaction costs. This means that low income people can buy more goods and services with the same income. There is a strong latent demand for goods and services among low-income people in developing countries. This is why China is promoting the use of QR codes for renminbi payments as part of its Digital Silk Road initiative. China is also benefiting from its massive investments in the distribution network that underpins the digital economy as part of its policy response to the economic slowdown following the bankruptcy of Lehman Brothers (in 2008).
Q: Will the digital renminbi give China a head start in its pursuit of leadership in global payments networks?
A: Leadership is not something you can get by pursuing it. It will require constant efforts to promote market principles, including reform and liberalization of financial markets. This is also true with the dollar, the predominant currency today. The strong economic growth of the United States and the high liquidity of US government bonds increased the dollar’s share in international payments, and as a result, the United States became the leader of the international financial system. It didn’t happen because the United States wanted it to.