When Deng Xiaoping set China on the course of market-oriented reform nearly 40 years ago, he called his pragmatic and incremental approach “stepping on stones to cross the river.” The Chinese currency’s much-ballyhooed entry into global finance has landed on a very small stone indeed.
The yuan accounted for just over 1% of global foreign-exchange reserves in the fourth quarter of 2016, according to the International Monetary Fund’s first such breakout, released on Friday. The $85 billion worth of renminbi holdings reported by countries who disclose the currencies of their reserves was barely half what they keep even in Canadian dollars, and a tiny fraction of the $1.6 trillion worth of euros and $5.1 trillion of dominant US dollars.
Beijing has actively promoted international use of its currency, extending swap arrangements with foreign central banks, encouraging trade settlement in yuan and opening its stock and bond markets somewhat wider to foreign investors. The IMF endorsed those measures last year when it included the renminbi in its internal currency, known as the special drawing-right basket. It gave the renminbi a weight of 11% – a third the share of the euro and a quarter of the dollar’s – suggesting a belief that the currency of the world’s second-largest economy would become a significant force.
Such shifts happen slowly, of course. However, the tiny impact so far may also reflect how much shine has come off the yuan’s international credentials. The authorities’ clumsy effort to halt a stock-market swoon in 2015 worsened the selloff. Their heavy intervention to prop up the renminbi subsequently burnt up about a trillion dollars of reserves. Lately the government has sought to stifle efforts by companies and individuals to move money offshore.
The use of the yuan in global trade has, if anything, gone into reverse. It accounted for 1.7% of payments in December, down from 2.3% a year earlier, according to payments network SWIFT. That’s consistent with the weak uptake shown in the IMF data.
Over time, the renminbi’s global role can only increase. But at least until Beijing turns back toward liberalization, the stones will be small and the river wide.
– Reuters Breakingviews
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