As the Chinese yuan (CNY) ascends the ladder in the world capital market, it is essential to take a nuanced view of this development. Experts suggest that while the yuan’s ascendance is undeniable, the evidence points more towards a domestic internationalization rather than a full-fledged globalization. Despite these nuances, statistics show that the yuan has become the second most traded currency in the world capital market, an achievement that underscores China’s growing economic influence. The concept of domestic internationalization refers to the process where a currency gains greater use and prominence within the home country’s borders and its immediate trading partners, rather than achieving a widespread global usage. In the case of the yuan, experts suggest that this is the present scenario. The yuan’s usage is more concentrated within China and its close trading partners, rather than being diffused across the globe. This situation is somewhat different from the typical trajectory of a globally dominant currency. This domestic internationalization is a result of China’s unprecedented economic growth, coupled with its increasing financial market sophistication. The Chinese government and the People’s Bank of China (PBOC) have been instrumental in promoting the yuan’s usage, both domestically and within the Asian region. Measures such as the development of offshore yuan markets, liberalization of the capital account, and the promotion of yuan trade settlement have contributed towards this domestic internationalization.

However, the term ‘globalization’ typically implies a currency’s widespread acceptance and usage across multiple regions and a broad range of economic sectors worldwide. By this definition, the yuan’s globalization is limited. Unlike the US dollar (USD) or the euro (EUR), the yuan is not widely used as a reserve currency by central banks around the globe, nor is it frequently chosen as the invoice currency in international trade deals outside of the Asian region. Yet, the yuan’s status as the second most traded currency in the world capital market is indicative of its growing importance in the international financial system. This reflects China’s growing economic clout, its increasing integration with the global economy, and the gradual internationalization of its financial markets. Despite this progress, experts caution that the yuan’s globalization should not be taken at face value. The yuan’s path to becoming a global currency is likely to be determined by a complex mix of factors, including China’s domestic economic policies, its approach to international trade, and the evolution of the global financial system. The rise of the yuan in the world capital market is a significant development that reflects China’s growing economic power. However, its current status appears more akin to domestic internationalization than full globalization. As the yuan’s journey continues, it will be crucial for policymakers, investors, and analysts to understand these nuances and tread with caution in interpreting the yuan’s role in the global economy.

By Sara Colin