Jakarta, CNBC Indonesia – The central bank of China (People’s Bank of China / PboC) again made a breakthrough to make the yuan more attractive and used in international payments. PBoC governor, Yi Gang, said China will seek to increase the flexibility of the yuan currency, and reduce restrictions on the use of the yuan abroad.
Yi, speaking at the Bund Summit conference in Shanghai on Friday (23/10/2020), added that these steps are needed to promote the opening of China‘s financial services industry.
“China will increase the flexibility of the yuan, allowing the exchange rate to play a bigger role as a counterweight to the macroeconomic and international balance of payments,” Yi said as quoted by Antara. CNBC International.
“In order to encourage the internationalization of the yuan, China will improve infrastructure use of the yuan between countries,” he added.
The move shows that China is increasingly promoting the yuan as an international currency.
“The internationalization of the yuan has gone from being desirable to being indispensable for Beijing. China needs to find a replacement for the dollar amid political uncertainty,” said Ding Shuang, Standard Chartered’s chief economist for the China and North Asia region, as reported. Bloomberg last July.
Every day the PBoC will set the yuan exchange rate against the US dollar, and let it move down or strengthen up to a maximum of 2% from the middle value.
PBoC control of the exchange rate becomes less favorable in trading transactions. PBoC can at any time weaken or strengthen the currency exchange rate which is also called the renminbi. Of course it will be less profitable when holding the yuan, then the PBoC depreciates its exchange rate significantly.
For example, in August 2019 when the PBoC depreciated the yuan exchange rate against the US dollar to its weakest level in more than a decade, turmoil arose in financial markets. The US has even called China a currency manipulator.
The yuan is one of the five currencies included in the IMF’s Special Drawing Rights (SDR), the other four namely the US dollar, euro, yen and pound. This status was only obtained in September 2016 and strengthens the position of the yuan as an international currency.
However, even though it has received this “special” status, compared to other currencies the portion of the yuan in foreign exchange reserves is indeed very small.
Based on data from the International Monetary Fund (IMF), the portion of the yuan in global foreign exchange reserves was only 1.92% or equal to US $ 230.4 billion in the second quarter of 2020. It is very far from the US dollar which “controls the world“, its share in global foreign exchange reserves reaches 57.45% or US $ 6,901.5 billion.
Yuan is only in the 5th position of the foreign exchange reserve currency. With the PBoC’s plan to make the yuan more flexible, of course the goal is to make the yuan more preferred and more and more used for international transactions.
In the next few years, the yuan is predicted to be included in the top three foreign exchange reserves. The portion of the yuan in global foreign exchange reserves has been growing consistently in the last few years. In the fourth quarter of 2016, the yuan’s share of global foreign exchange reserves was only 1.07%.
The increase in the yuan’s portion is predicted to continue in the coming years, reaching 5-10% of the total world foreign exchange reserves.
“Ultimately, what we think will happen in the next 25 years is that we will go forward, we will have a world with three major currencies: the US dollar, the euro and the yuan,” said Massimiliano Castelli, head of strategy and advice, global sovereign. markets, from UBS Asset Management, as reported by Reuters.