Has Stabilising the Yuan Undermined Ambitions for Its Internationalization?


Measures adopted by Beijing to curb capital outflows and stabilise the Chinese yuan may have undermined plans for its internationalisation and expanded usage in overseas jurisdictions.

Writing in the Wall Street Journal, Nathaniel Taplin notes that China’s central government has managed to successfully curb the large-scale capital flight that took place across 2015 and 2016, with the foreign reserve increase of $24 billion in July marking the sixth consecutive month of expansion.

According to Taplin the recent gain in China’s foreign reserves has been partially the result of a faltering greenback, leading to appreciation in its euro and yen-denominated holdings.

Official curbs, however, have also proved effective at slowing down real capital outflows, and reducing net foreign-exchange sales by Chinese banks to a mere trickle. This has helped to push the yuan up around 3% against the dollar since the start of 2017.

The past two years were characterised by a heavy exodus of funds as Chinese companies embarked upon overseas acquisitions sprees, prompting Beijing to launch measures towards the end of 2016 to stymie the outflow of capital.

“Given the scale of the bleeding in 2015 and 2016, China’s leaders likely had little choice but to close the drawbridge,” writes Taplin.

The measures appear to have proved successful, with Beijing reporting a 42.9% year-on-year drop in outbound investment to 331.1 billion yuan in the first half of 2017.

While the measures may have been needed to safeguard China’s foreign reserves and stabilise the value of the yuan, according to Taplin they have also undermined efforts led by China’s central bank to promote the internationalisation of the Renminbi.

Data from payment services provider Swift indicates that the Chinese yuan has fallen to sixth place when it comes to currencies employed for international payments, below the Canadian dollar and just above the Swiss franc.

As recently as 2015 the yuan had overtaken the Japanese yuan to occupy fourth position.

Swift data further indicates that yuan-denominated payments have fallen from 2.09% of all international payments that it tracks two years ago, to only 1.98% as of June 2017.