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[BEIJING] China's steps to control capital outflows and lingering expectations of further yuan depreciation are likely to impede the pace of yuan internationalisation, which has lost momentum over the last two years, international ratings agency Fitch said.
Beijing has announced a string of measures since November to tighten controls on money moving out of the country, including closer scrutiny of outbound investments, large overseas money transfers and individual foreign exchange purchases.
"Policies to contain capital outflows and ongoing concerns over currency depreciation are likely to hold back internationalisation in the short-term," Fitch Ratings said in a report published on Monday.
"Progress toward the Chinese renminbi becoming a more important global currency has lost momentum over the last two years, notwithstanding its landmark inclusion in the IMF's Special Drawing Rights (SDR) currency basket in late 2016," it said.
But a gradual increase in holdings of yuan, also known as the renminbi, by reserve managers could still support China's rating profile over time, it added.
The proportion of international currency payments denominated in the yuan fell to 1.8 per cent in March 2017 from 2 per cent a year earlier, Fitch said, citing data from Swift.
Still, highlighting data from the China Central Depository & Clearing Co, the agency noted that the share of external holdings of Chinese government bonds during the same period increased to 3.9 per cent from 3 per cent.
The yuan could be used as a reserve currency over the long term given the global importance and inter-connectedness of China's economy, Fitch said.
Data released by the International Monetary Fund in March showed China's share of allocated currency reserves, reported by the IMF for the first time, totaled just over one per cent, or US$84.51 billion.
Policy stimulus has stabilised the economy, but leverage and financial risks continue to build, Fitch said, adding that investor concerns about medium-term financial stability are likely to dent the yuan's attractiveness.
The yuan has stabilised this year, due to curbs on capital outflows and a reversal of the US dollar rally, following a fall of 6.5 per cent in 2016. Still, it is widely expected to weaken further versus the US dollar this year.
The Chinese authorities are unlikely to pursue significant capital account liberalisation if it poses risks to domestic financial stability, Fitch said.
"We therefore expect capital controls to be lifted in an asymmetric way over the next couple of years, with restrictions on inflows relaxed steadily and those on outflows mostly kept in place," it said.