Trump’s policies make a fully convertible yuan by 2020 impossible, say financial experts

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Industry watchers say a stronger dollar and Beijing’s strict capital controls will slow the pace of internationalising the Chinese currency

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Trump’s policies including tax reforms and interest rate rises aimed at boosting the American economy are likely to strengthen the US dollar against the yuan. Photo: Washington Post

Enoch Yiu

Published: 1:30pm, 11 Jan 2018Updated: 12:54pm, 12 Jan 2018

Donald Trump’s second year in office may prevent China from achieving its target of allowing the yuan to become fully convertible by 2020, according to industry watchers.

The US president’s economic policies including major tax reforms and interest rate rises aimed at boosting the American economy are likely to strengthen the US dollar against other currencies including the yuan. And that may slow down the process of internationalising the Chinese currency, explains Aidan Yao, senior emerging Asia economist at AXA Investment Managers.

“China has made it crystal clear that it would like to continue to reform its economy and boost international use of the yuan. The direction of internationalisation of the yuan is clear but the pace of that internationalisation would depend on a lot of social and economic factors,” Yao said on the sidelines of the South China Morning Post’s China Conference on Thursday.

It’s a long way from being used in international financial markets as an investment currency

Aidan Yao, AXA Investment Managers

“A stronger US dollar would lead to depreciation of the yuan, which would create an adverse effect on the internationalisation of the currency. A fall of the yuan against the US dollar, such as what we saw in 2015 and 2016, makes investors less interested in buying dim sum bonds. China would also need to bring in measures to restrict capital outflows.”

The yuan’s 7 per cent slide against the US dollar in 2016 sparked a tide of funds leaving the mainland as individuals and companies ploughed money into insurance policies, properties, stocks and other assets in Hong Kong and overseas to hedge against the falling currency.

John Woods of Credit Suisse said during a panel debate at the China Conference that a fully convertible yuan ‘is not going to happen any time soon’. Photo: Nora Tam

Sales of dim sum bonds – offshore yuan bonds issued in Hong Kong – dropped to a record low as the currency risk put investors off. The amount of yuan deposits in Hong Kong fell by half to about 500 billion yuan at the end of November.

Since late 2016, Beijing has introduced a string of measures to restrict capital outflows. Meanwhile the People’s Bank of China has tightened its control of the fixing rate of the yuan, a move that brought some stability to the currency. The yuan rose 6.8 per cent against the US dollar in 2017.