Yuan trade settlement mission impossible, for now
The People’s Bank of China’s ambitious plan to settle foreign trades in yuan has been given the cold shoulder by companies both at home and abroad. The failure of this experiment shows the difficulties China faces in internationalising its currency.
Launched by the PBOC with a fanfare almost two months ago, the pilot scheme has so far seen only thin volumes of yuan trade settlement. Guangdong province, the country’s export hub, was supposed to be the cornerstone of the plan, but local officials said they found few willing counterparties.
This should not have come as a surprise. Foreign importers either have little access to the yuan, are reluctant to part with it, or do not want to commit future payment in a currency that is expected to appreciate. More surprisingly, domestic exporters, who would benefit from lower currency risks, are put off by the logistical headache of receiving domestic currency for their exports.
These concerns aside, there is a more fundamental reason why the yuan is not catching on. The Triffin Dilemma, named after the Belgian-American economist who rose to prominence in the 1960s, stipulates that it is hard for a country running a large trade surplus to demand that others buy goods using its own currency.
The world now suffers from an oversupply of the manufactured goods that are China’s specialty. Thus it is hard for China’s millions of small exporters to demand that Wal-Mart pays them in yuan, or for thousands of small Chinese steel mills to persuade Rio Tinto and BHP Billiton to accept the Chinese currency.
Only exporters in countries such as Indonesia, which has a limited amount of foreign reserves, have an incentive to sell goods such as timber to China in exchange for yuan, which can be used to buy imports from China later. But given the lack of convertibility of the yuan, it is probably not worth going through the hassle.
It is understandable that the PBOC, which counts fighting inflation as a main task, wants to push some yuan offshore in order to address the problem of domestic oversupply of the currency. But others may have different ideas. China’s Ministry of Finance, for example, has championed for the use of a pan-Asia currency. The Ministry of Commerce may not deem now the best time for struggling Chinese exporters to demand that buyers take on their currency risks.
It also appears that the PBOC had not worked out some of the logistics before launching the pilot scheme. Exporters had problems navigating customs under the new scheme, as well as claiming export tax rebates if they didn’t have foreign currency receipts.
The PBOC this week hosted a web conference with the bureaus of finance, commerce, customs, tax and banking regulation to iron out the kinks and unveil some new incentives. One of them is allowing yuan earned from exports to stay abroad to encourage more use of it outside China, instead of it having to be repatriated immediately. But by loosening capital controls on trade settled in yuan, the PBOC faces heightened risks of money laundering as exporters can overstate the value of their goods to get the Chinese currency offshore.
As China’s economy rebalances over time, the prospects of currency appreciation subside, and Chinese companies start to have more negotiating power, there might be more interest in using yuan as a settlement currency. But this remains a long shot for the PBOC.
Japan, which has fewer capital controls as well as a more developed domestic bond market than China, has been pushing the yen abroad for 20 years. Even so, the currency is still rarely used to settle international trade. The PBOC is facing a long struggle to realise its master plan.
— At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —