August 4, 2015 1:00 pm JST
Currency markets

Chinese scholars call for go-slow approach on taking yuan global

TADANORI YOSHIDA, Nikkei senior staff writer

TOKYO -- China's economic ambitions include bringing the yuan into the global reserve currency basket. Doing so will raise the country's status and bring it closer to the U.S. in terms of global economic standing.

     Some in the country, however, believe it is too soon for the yuan to go international. Chinese researchers at a major state-backed academic institution are among those worried.

     Beijing is trying to have the yuan included in the basket of currencies that make up Special Drawing Rights, an international reserve asset created by the International Monetary Fund. The basket will be reviewed this year. The yuan could become the fifth key international currency in the basket, along with the dollar, the euro, the yen and the pound. It would mark the first time an emerging country's currency has been included.

     The U.S. opposes the idea, saying reforms to the yuan's exchange rate are insufficient. In late June the U.S. urged China to make the yuan freely convertible, like the dollar and other major currencies, at a strategic and economic dialogue between the two countries in Washington.

Dilemma

Despite Beijing's push to internationalize the yuan, some Chinese experts are cautious. Zheng Liansheng and Zhang Ming, researchers at the Chinese Academy of Social Sciences, a government-backed think tank, recently aired their concerns online. In their view, after the currency joins the basket, China will come under pressure to free interest rates and improve transparency in the setting of the yuan exchange rate. This, in turn, will force it to allow free capital flows in and out of the country, something that might lead to financial instability.

     Changes in China's monetary policy, specifically in the central bank's benchmark loan and deposit rates, draw much attention in the financial markets. But "administrative guidance" -- orders by authorities for banks to increase lending -- counts for more in China. Policymakers issue such directives whenever economic indicators flash red.

     Chinese authorities work to control the amount of currency in circulation. Freeing the capital account would rob them of this control and make China's quantity-oriented monetary policy less effective.

Long game

This is the conundrum China faces: The country is still in the early stages of reforming its financial system. Joining the elite currency club will boost its global prestige. But it has not fully liberalized interest rates and is not fully comfortable with using these rates to steer monetary policy to achieve its goals. This raises the question of how free capital flows will affect the economy.

     Zheng and Zhang say it is only a matter of time before the yuan becomes part of the SDR basket as China's economic power increases and becomes more globalized. They argue there is no need to rush. They also imply the country is not yet capable of joining the international currency club and should not overextend itself.

     China's economy has so far been underpinned by the strength of Beijing's grip. If capital begins flowing across its borders beyond the authorities' control, the impact could be much larger than the recent stock market nosedive in Shanghai.

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