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Morgan Stanley analysts led by Robin Xing wrote recently that global investors will flock to China for yuan-denominated financial assets, and that the value of portfolio investments could reach US$3 trillion by 2030. The total foreign holdings of Chinese onshore bonds totalled 2.8 trillion yuan (US$409 billion) as of the end of August.
Meanwhile, the yuan could account for between 5 per cent and 10 per cent of global foreign exchange reserve assets by 2030 ― a large increase from the 2.02 per cent reported by the International Monetary Fund (IMF) at the end of March. That potential level would surpass the Japanese yen and British pound, making the yuan the third most-recognised currency after the American dollar and the euro, the team at Morgan Stanley predicted.
"This [5 per cent to 10 per cent] target is not unrealistic in light of the financial market opening in China, growing cross-border capital market integration … and the increasing proportion of China's cross-border [yuan] transactions," the investment bank's team said.
The analysts argued that the increased tensions between China and the United States would push Beijing to "fast-track" its efforts to boost international use of the yuan.
The report, penned by 16 analysts at the bank, painted a rosy picture for the future of the yuan, which earned a nominal international currency status at the IMF in 2016. Actual use of the yuan on an international scale, however, has remained limited, partly because of China's capital controls.
Discussions regarding the increased promotion of the yuan overseas intensified in recent months as Washington threatened financial sanctions on Chinese individuals and institutions over a range of hot-button issues, including Hong Kong's national security law, alleged human rights abuses in Xinjiang, and national security. These sanctions could potentially include denying access to the US dollar payment system or the US market.
Policy advisers have also presented a series of suggestions to reduce the country's reliance on the US dollar, including building Shanghai into a global financial centre for yuan products, establishing China's own cross-border payment system to facilitate outbound investment, and launching a sovereign digital currency.
Beijing embarked on the strategy with cross-border trade settlement in 2009, which was later expanded to outbound investment in belt and road countries. Despite a significant rise in the yuan's market share over the past decade, in terms of international payments, settlements and reserves, it still lags far behind the US dollar.
However, it will be helped by the diversification needs of the rest of the world. "Global demand for yuan-denominated assets could rise in a post-Covid, ultra-low-interest-rate, multipolar world," according to the Morgan Stanley report.
China is so far the only major economy expected to see positive growth, of 1 per cent, this year amid the pandemic, compared with a contraction of 8 per cent for the US. Meanwhile, China's central bank has maintained a normal monetary policy ― which means the yield in China is higher than in mature markets ― and the country's foreign exchange reserves edged up by US$10.2 billion in August to US$3.16 trillion.
The solid economic fundamentals have brought optimism over the future of the Chinese currency and its exchange rate. For instance, Essence Securities' chief economist, Gao Shanwen, said last week that the yuan has emerged from a depreciation cycle in the last five years and will enter a cycle of consistent appreciation that could last years.
"Appreciation will increase the attractiveness of yuan-denominated assets and lure overseas investors to allocate capital to yuan assets," Gao said.
The Chinese currency recently strengthened to a one-year high against the US dollar, and it was at 6.8415 to the US dollar on Monday night. An upward slope in that figure indicates a depreciation in the value of the yuan, while a downward slope indicates yuan appreciation.
"The yuan exchange rate remains flexible and resilient, playing the role of stabiliser well in adjusting the international balance of payments," Zheng Wei, deputy head of the State Administration of Foreign Exchange, said at a forum in Beijing on Sunday. "We will steadily enlarge the two-way opening and connections of financial markets."