Commentary: Why China is not rising as a financial superpower – CNA



Unlike the US and Japan, China’s economic rise has not resulted in the yuan becoming a global currency. Beijing has not found the confidence to lift capital controls and make the yuan fully convertible, says the Financial Times’ Ruchir Sharma.

Ruchir Sharma

21 Jun 2022 06:05AM (Updated: 21 Jun 2022 06:05AM)



China’s rise has such a grip on the popular imagination that many analysts still see it everywhere. They depict the yuan’s tiny 3 per cent share of global central bank reserves as quick progress because it is up from 1 per cent five years ago.

But this share is similar to those of far smaller economies like Canada or Australia, and well behind what analysts have been projecting.

The hurdle is trust: Foreigners are wary of a meddling state, but more importantly, the Chinese distrust their own financial system. China has printed so much money to stimulate growth over the past decade, the money supply now dwarfs the economy and markets.

That capital may flee when given the chance. When Beijing was facing significant outflows seven years ago, the government imposed controls to prevent capital flight. It has yet to lift them.

Instead, China has turned financially inward. Since 2015, the yuan share of payments through the Swift network for international bank transactions has fallen by a fifth, from an already negligible level under 3 per cent.

While Chinese investors are restricted from investing abroad, foreigners are scared away from China by erratic government attempts to control the market. That helps explain why unlike in other nations, stocks in China do not rise and fall with economic growth.


Global doubt about China’s markets limits the yuan’s appeal. Today, over half of all countries use the dollar as their anchor, a soft peg to manage their currencies. None use the yuan. About 90 per cent of foreign exchange transactions involve the US dollar, while only 5 per cent use yuan.

Today, the yuan is not viewed as a safe haven, Chinese stocks languish and no Chinese city is more than a regional financial centre.

China still aims to become a financial superpower. Its leaders understand that as a country gets richer, it has greater need for a functional financial system. The Chinese government has seen how the mighty dollar allowed the US to militarise finance in sanctioning Russia, and wants that same leverage.

But for now, Beijing doesn’t have the confidence to take the basic steps of lifting capital controls and making the yuan fully convertible. Until it does, China will never fully realise its superpower ambitions.


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