Yuan the Conqueror: Chinese currency poised to become global heavyweight, economists say

The global importance of the Chinese yuan seems destined to rise, according to strategists and economists who say flows in the currency will grow over the long term if Beijing continues to gradually open its financial system.

The yuan will become more globally important as China further allows foreign capital into the country through selective financial opening and pursues its Belt and Road Initiative trade, said Chi Lo, senior economist for Greater China at BNP Paribas Asset Management in Hong Kong.

“So if you look along that direction there’s no way the yuan can be a weak currency, otherwise people won’t accept it and it cannot be a global currency if it’s a weak currency in the long term,” Lo told CNBC on Monday.

Global financial transfer system SWIFT said in its recent monthly report on the yuan that it was the sixth most used currency in domestic and international payments value in October, just behind the Canadian dollar.

According to HSBC, markets have been focused on the trade war between China and the United States as the main factor affecting the yuan. However, China’s opening of its financial markets is “probably the more important and enduring influence” on the currency, the bank stated.

“The [yuan] will be increasingly driven by capital account flows, and not just trade-related flows,” said HSBC.

It pointed out that China’s financial opening accelerated this year, with portfolio investments by foreigners reaching an all-time high.

The bank expects a significant shift coming as China opens the door further: “We believe this is only the beginning of a multi-year trend for portfolio investment rebalancing, globally.”

The policy of “reform and opening up” to the outside world was been introduced by the Communist Party 40 years ago. The process has been quite gradual and tightly controlled and that is likely to continue, according to Lo. He called China’s capital account opening “asymmetric,” meaning it allows more capital in than that going out.

Chinese authorities clearly want the yuan to play a bigger global role, Qinwei Wang, senior economist at Amundi Asset Management, told reporters in Hong Kong. He cited currency swap arrangements the People’s Bank of China has reached with other central banks as an example. They can be seen as part of “China’s efforts to improve, increase the acceptance of the [yuan’s] internationalization,” he said.

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