China has made no secret of wanting to cut its dependence on the U.S. dollar. Few officials have said directly that they want the yuan to challenge the dollar for global supremacy. Yet they have made their intent clear to observers, as seen with this week's debut of yuan-denominated oil futures trading in Shanghai.
Through decades of explosive economic growth, China continued to heavily restrict the cross-border use of the yuan such that even in 2010, its movements were probably no freer than they had been 30 years before. Then things started to change.
For nearly a decade now, China has been actively promoting yuan internationalization. A deliberate policy shift freed companies and individuals to start holding yuan deposits in Hong Kong. A slew of subsequent initiatives saw additional offshore yuan centers spring up across the globe.
Overseas yuan holders were granted access to yuan-denominated securities through the Renminbi Qualified Foreign Institutional Investors program and other cross-border trading links. The domestic bond market was opened to offshore financial institutions in 2016. The People's Bank of China struck yuan swap agreements with dozens of its counterparts.
All this culminated in the inclusion of the yuan in the International Monetary Fund's special drawing rights currency basket in October 2016.
Meanwhile, below the surface there have been clear signs the yuan has been only a short-term opportunistic trade, drawing little natural interest.
Hong Kong is the largest center for offshore yuan deposits, followed by London, Taipei and Singapore. From the beginning of 2010 to the end of 2012, total yuan deposits in Hong Kong rocketed from 64 billion yuan ($10.2 billion) to 589 billion yuan and on to an all-time high of 1 trillion yuan two years later.
The accumulation of yuan in Hong Kong came at the relative expense of deposits of U.S. dollars. This dynamic made complete sense. U.S. dollar deposits even now still earn little to no interest; the yuan from 2010 through to mid-2015 paid interest of a few percentage points and seemed almost guaranteed to continue appreciating against the U.S. dollar.
Then came the summer of 2015. With the yuan at an all-time high against the dollar, the PBOC without warning pushed the yuan down by more than 3% over three days.
All expectations of a well-managed currency were upended. The yuan lost its luster and started to weaken further. Not surprisingly, offshore yuan deposits began to fall. Over the subsequent two years, Hong Kong yuan deposits dropped almost in half.
Predictions in late 2016 that the yuan would fall to 7.5 or lower against the U.S. dollar were completely off the mark. Instead the currency strengthened throughout 2017 and this week hit 6.27 to the dollar, its highest level since mid-2015.
The U.S. dollar meanwhile is still barely earning interest and the yuan has appreciated significantly. Yet yuan deposits have hardly rebounded in Hong Kong, Singapore or Taiwan.
Can the world's next superpower really command so little interest in its currency?
Perhaps this is unsurprising. Data from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, shows the yuan is only about as widely used for international payments as the Canadian dollar and that it is nowhere near challenging the euro or dollar as a global medium of exchange. The yuan is hovering around 5th in the rankings of most-used currencies for international payments and commands less than 2% of the market.
China's Belt and Road Initiative has been labeled as an ideal vehicle for promoting the use of the yuan overseas. But what do nations have to gain by tying themselves to a currency that investors accustomed to open markets look upon with disinterest, if not suspicion?
For all its steps toward liberalization, the Chinese financial markets remain shallow, narrow and untrustworthy. If Chinese stocks and bonds have not generated greater yuan interest, it is not clear why oil futures will. Offshore liquidity in Hong Kong has been reined in by Chinese authorities who want the benefits of market price discovery but won't accept the accompanying volatility and uncertainty.
Rather than herald a new era of openness for the currency, inclusion in the IMF's SDR basket marked a high point from which Beijing has slowly and quietly retreated. Capital controls remain broad and largely effective. The massive currency outflows seen after the 2015 mini-devaluation have abated but there are still serious concerns about what steps the state will take in the event of another crisis.
China under President Xi Jinping has shown time and again that it will not hesitate to intervene in markets or with private companies when it deems appropriate. But there is no conspiracy against the Chinese currency and no cabal of foreign hedge funds or intelligence agencies plotting its collapse.
It is a matter of basic economics and finance at work. China's economic size is not in question but the answer to the question of what one can do with yuan is simply "very little."
Back in 2010, many investment banks and China watchers followed the early steps of yuan internationalization with high expectations. One predicted it would be basically convertible by 2015. Another said it would be fully convertible within a decade.
Those predictions are proving well off the mark. Chinese companies and markets still present opportunities for investors but this is not going to translate anytime soon into a move away from the dollar or toward the yuan.
Fraser Howie is co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise." He has worked in China's capital markets since 1992.