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The new symbol of China

By Luo Jiexin (China Daily)
Updated: 2010-12-09 15:39

What comes to mind when you are naming something to represent China in the next decade? The choices can be many: A dragon, the Great Wall, taichi and Peking Opera.

My answer is the yuan.

In my mind, nothing is more suitable than the Chinese currency to represent the country, now the world’s second largest economy after the United States.

Indeed, the popularity of the Chinese currency has received a big boost over the past few years, with about 10 countries and regions accepting the yuan in trade deals with China.

Russia was the latest to join the bandwagon after Premier Wen Jiabao and Russian Prime Minister Vladimir Putin met last month.

Since the yuan de-linked from the greenback in July, overseas investors have been more than willing to put the yuan in their wallets or banks on expectations the currency will continue to strengthen against the US dollar and many other major global currencies.

A proof of the currency’s growing popularity was that the yuan deposit in Hong Kong rose by a stunning 45.4 percent year-on-year to 217.13 billion yuan ($32 billion) in October.

Foreign governments are also starting to put the Chinese currency into their national coff ers, with reports that Malaysia bought yuan notes as its foreign exchange reserves in September.

Undoubtedly, the yuan’s popularity will grow, making it likely the currency will become one of the world’s foreign exchange reserves units.

The world’s worst fi nancial crisis in seven decades has shed light on the demerits of the monetary system dominated by the US dollar, and calls for a more diversifi ed and balanced system are growing louder.

As China’s economy continues to grow, its currency goes regional. As the euro faces its most severe challenge amid renewed sovereign debt crisis, the yuan climbs up the global currency ladder.

The yuan portfolio has been snowballing especially in Hong Kong, thanks to rises in tourist spending, personal savings and trade settlement as well as Chinese and international institutes’ enthusiasm to issue yuan debts in the city.

However, there is a big hurdle preventing the yuan from growing more popular internationally — the lack of eff ective channels for overseas investors to spend the Chinese money they hold.

Apart from shopping in and doing trade with China, there are very few legal channels for them to make quick gains from yuan notes.

After all, China has not yet opened its capital account — and hence foreign investors face a lot of limits when investing their yuan notes in the fi nancial market, which produces quick and good returns.

That, along with the fact the yuan is still not fully convertible, dampens the liquidity of the yuan and hence sours investors’ confi dence in and popularity of the yuan in future.

China is stuck in a dilemma.

On the one hand, the country must open its markets wider to overseas investors to absorb the yuan parked overseas. Only by doing so, can the currency win the hearts of foreigners in the long run.

On the other hand, China is worried a hasty opening-up of its markets, and fi nancial sectors in particular, will usher in an influx of hot money and hence cause severe asset bubbles and harm to its fi nancial security. 

The country’s policymakers know that China remained healthy despite the Asian fi nancial crisis and the recent world’s fi nancial crisis thanks to its partially closed fi nancial market, which helped fend off the impact of international turbulence.

In that sense, China does not want to open up its fi nances too quickly before it is convinced its homegrown industry is strong enough to withstand a fi nancial meltdown like what the world has just experienced.

Beijing’s concern of international capital invasion ran exceptionally high recently as it left no stone unturned in its fight against inflation, which reached a 25-month high of 4.4 percent in October.

Terefore, highly speculative sectors such as stocks and real estate should not top the choices when China opens its markets.

One solution is to allow overseas yuan holders to invest in China’s bonds market.

Institutional holders of the yuan in Hong Kong are now allowed to invest in the mainland’s interbank bonds market. The deregulation should be made for all foreign yuan holders.

This prevents money from flooding to “sensitive industries” — stocks and real estate — and will not have a huge impact on China’s financial system, because the government can minimize negative impacts in various ways.

If necessary, China can earmark a quota for the amount of money overseas yuan holders can invest in China. The authority can also allow only approved qualifi ed institutional investors to invest.

The author is an independent fi nancial analyst and business consultant in Shanghai.