China Revives Global Yuan Push as Capital Outflow Worries Fade

China Revives Global Yuan Push as Capital Outflow Worries Fade

HONG KONG, BLOOMBERG -- After more than two years on the back-burner, there are signs that China is once again focusing on its efforts to increase the yuan’s status in global finance.

Since May, initiatives from the central bank and government have included:

Starting full operation of a new phase of an international payment system, extending its running hours

Making it easier for overseas lenders to borrow the yuan, to help facilitate foreign investments in onshore bonds and stocks

Signaling the resumption of a program for mainland investors to buy offshore assets with the yuan that’s been on ice since 2015

The yuan grabbed a record 2.8 percent slice of global payments three years ago, before a crackdown on outflows in the wake of the 2015 devaluation saw that figure shrink to 1.7 percent as of April. These days -- with China’s foreign reserves rising and volatility staying low -- officials have a window to refocus on President Xi Jinping’s quest for a bigger Chinese role in global finance.

"There will surely be more utilization of the currency in cross-border transfers this year," said Ji Tianhe, a China rates and foreign-exchange strategist at BNP Paribas SA. "The exchange rate will be influenced by global financial markets more. Offshore investors will also become a more important driver for onshore bonds."

Recent strength in the yuan -- which had its biggest rally in 10 years in the first quarter -- has given policy makers room to relax curbs on outflows. China’s foreign reserves, the world’s biggest, increased in all but only three months since the start of last year, while overseas demand for the currency is showing some signs of picking up. Hong Kong yuan deposits increased the most since 2011 in April, according to data released last week.

Building Ties

On top of other measures, a long-term project also may also help boost the yuan’s role: Xi’s Belt and Road Initiative to deepen economic ties with countries across the Eurasian landmass and beyond.

"BRI trade and investment would definitely increase currency flows between China and other Belt and Road countries," said Ben Yuen, Hong Kong-based fixed-income chief investment officer at BOCHK Asset Management Ltd.

The pace of moves to broaden the yuan’s role remains captive to investor confidence. A steeper rally in the greenback, which just capped its seventh week of gains, could renew concern about a depreciating yuan. The stock market remains stuck in the doldrums, despite MSCI Inc. adding local stocks to its gauges and rising corporate defaults are rippling through the nation’s bond market.

For now, foreign funds appear bullish on Chinese assets, buying a record amount of the nation’s shares last month, while also emerging as the dominant force in government debt. Although the yuan has fallen 2.5 percent against the dollar from its March high, there’s little concern about moves getting out of control -- one-month implied volatility is near an almost five-month low.

Conditions are ripe for officials to take additional steps to boost its global sway, according to MK Tang, Hong Kong-based senior China economist at Goldman Sachs Group Inc. These may include making it easier for foreigners to buy Chinese bonds and allowing domestic investors to buy more overseas assets.

"Internationalizing the yuan would be a natural step for the government to take now," said Tang.