Next steps will be incremental, experts said.
“The Chinese government is more likely to focus on expanding currency swap arrangements with trading partners and increasing the use of yuan in trade settlement, particularly with commodity exporters,” said Su.
“Expanding yuan-denominated lending to the Global South is another likely approach,” Su said, adding that China is also positioning itself as a provider of alternative financial services – beneficial to US-sanctioned countries such as Iran.
“Mitigating vulnerability to financial coercion” also remains a challenge, said ING’s Song.
“If a country is cut off from SWIFT, is it able to continue to operate more or less as normal?”
“Maintaining relative currency stability is also conducive for internationalisation,” Song said, adding that wild swings raise costs of hedging, uncertainties, and reduce the appeal of holding the yuan as a reserve currency.
But the pace of opening is constrained by the risk of capital flight, Lin from The Asia Group noted.
“There are a lot of Chinese who would love to get their money out of the country if they could.”
If China exhausted its foreign reserves, it would lose the ability to import dollar-denominated commodities, attract FDI or defend the currency, said Lin.
That would be a “nightmare for China”, he said.
To Lin, the currency push is ultimately about more than trade or finance.
“When we talk about loosening currency, it’s far more than just a way to get the world to transact with China in yuan – there is a political element,” Lin said.
As more countries adopt the yuan for investment and capital-raising, Beijing gains the ability to direct capital toward its strategic priorities – making currency liberalisation a tool of geopolitical influence, he said.
“This currency liberalisation attempt is essentially how China expands its influence across not only the trade domain or the security domain, but increasingly the currency domain as well.”
But the process will be long, he cautioned.
“I think it’s likely going to happen – and China is signalling that, but it will probably be many, many years. And even now, China is very hesitant to open up the capital control.”
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