David Brown

Macroscope | Investor confidence in China’s yuan and financial markets hangs on stability

China’s strong economic fundamentals are a big plus in its push for renminbi internationalisation. The trick lies in liberalising its financial markets at just the right pace, without exposing them to too much risk

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An employee counts yuan notes at a bank in Baokang, in central China’s Hubei province, in November 2007. Photo: Reuters

David Brown

Published: 9:30pm, 24 Apr 2023

China has made great progress opening up its financial markets to the world but still needs to speed up the process. Beijing wants broader acceptance of the renminbi as an international medium of exchange and for it to become a more popular reserve currency, but its share of the global official reserves market still only stands at a meagre 2.7 per cent.

The challenge is how to break into the big time and take on the euro’s share at 20 per cent of the market, let alone challenge the US dollar’s dominance with a 58 per cent market share. Beijing still has some way to go to fully internationalise its currency, opening up its markets to all-comers and building global confidence in China as a safe enclave for investors.

The dilemma is opening up China’s financial markets without exposing the renminbi to too much implicit risk in the process.

Without a doubt, China’s sovereign credit standing and foreign earnings capability are extremely strong, underpinned by a record trade surplus in 2022, surging by about 30 per cent over the year to US$877.6 billion, the highest since records began in 1950.

Yet, in the past 10 years, China’s official currency reserves have fallen from a peak of about US$4 trillion in 2014 down to just over US$3 trillion at present.

Beijing’s understandable concern is that by opening up its capital markets at too rapid a pace, it might spark an outflow of hot money, adding a further drain on reserves in the process. It might be the price of increased internationalisation for the currency, so the challenge is finding an appropriate balance that promotes financial stability.