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Can Yuan Be A Global Currency?

By Wong Kon How

If China wants its yuan to become a globally used currency, Beijing would need to have open capital markets and full currency convertibility, IMF's Gopinath says.

She said history has shown that reserve currencies widely used in global trade transactions, such as the dollar and the British pound, do not have capital restrictions, as China does.

"If a country is aspiring to be a global currency, then in that case, you would need to have, you know, basically fully and freely mobile capital, full capital account liberalisation, full convertibility of exchange rate, which is not the case right now in China,"

Good news for China:

On 30 March 2022, the IMF updated its institutional guidance on capital controls. This will allow for the use of pre-emptive measures to reduce the risks of abrupt capital outflows causing financial crises or deep recessions.

Under the new guidance, countries would no longer have to wait until capital flow surges materialise and can impose such measures to counter a gradual buildup of foreign currency debt that is not backed by foreign currency reserves or hedges.

Gopinath said some countries with fixed exchange rates might have more reason to employ capital flow measures pre-emptively because they would have fewer tools to counteract sudden capital outflows.

The capital flow measures should also not be used by countries to counteract unsustainable fiscal policies, or to influence a country's exchange rate for competitive advantage.

"It's not about you influencing your exchange rate to keep it weak for competitiveness purposes," Gopinath said.

The China Yuan has been strengthening since the last quarter of 2019 and has accelerated against the U.S. Dollar with the Covid era. A strong currency helps to battle inflation and China’s inflation has been under control during this period.

Source: CNA

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