Olga Ponomareva, expert at the Economic Policy Foundation, explained China's strategic goals and benefits from the internationalization of the yuan, as well as the constraints that exist along this path, in a commentary for Izvestia.
Olga Ponomareva said that China's goal of making the yuan a global reserve currency is driven by its desire to reduce its dependence on the dollar amid geopolitical tensions. "Wider use of the yuan will reduce the risks of sanctions pressure through existing global payment and settlement mechanisms. In addition, China's currency reserves, the largest in the world, are denominated in dollars, which also creates both political and economic risks in the event of exchange rate fluctuations," the expert said.
She also noted that for China, as the largest economy in terms of PPP and the second largest in terms of exchange rate, it is important to raise its status and influence in the global financial system. The status of a reserve currency issuer will give the country economic advantages, such as more favorable lending terms, lower interest rates on government bonds, and allow businesses to reduce costs in international operations.
However, Olga Ponomareva also pointed out a number of limitations. The main one is the incomplete convertibility of the yuan and capital controls. “In general, a high level of development of the financial system, stock markets, corporate and government bonds is required for greater flexibility and attractiveness to foreign corporate and institutional investors,” the expert stressed. In addition, foreign investors need transparency, predictability of the financial market, and the independence of key regulators, which is quite difficult to ensure under China's current system, especially the independence of the People's Bank of China.
Despite this, China is gradually promoting its currency through trade agreements, settlements with partners, including Russia, and its own CIPS payment system. "One way or another, the internationalization of the Chinese yuan is a long-term strategy for decades to come, which involves the gradual opening of the financial market with the active promotion of the yuan in foreign trade and international settlements. Success will depend on China's ability to carry out deep internal reforms in the financial sector, which will require greater implementation of market mechanisms and less state control," concluded Olga Ponomareva.