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Francis T. Lui
Professor of Economics at Hong Kong University of Science and Technology Business School and a member of China Economics Award Experts Nomination Committee
In the second talk with Francis Lui, Professor of Economics at Hong Kong University of Science and Technology, Dukascopy Bank has asked Professor to comment specifically on the Chinese currency's potential entering free-trade and becoming a future global reserve currency.
China has been very cautious in this regard. We can look at several measurements. For example, M2* in China has now increased to almost 80 trillion Yuan. Considering the current exchange rate with the US Dollars China's M2 amount in US Dollars will be close to 12 trillion or so, which is smaller than present amount of M3 than US Dollars, but larger than M2 in US Dollars. That means that the money supply in China is already very sizeable.
What the Chinese government is worried about is that once it has completely opened its monetary system then could be subject to speculative attacks and there could be increased volatility, I mean the capital inflow and outflow. I believe that this kind of concern may be exaggerated. This is due to the total money supply in China being too big. It would be exceptionally hard for the speculators to attack it. The speculators will have to be extremely rich and I do not think that there is such speculator in the world who can assault the US Dollar. It works like this: if they cannot beat the US Dollar, then they cannot do any harm to the Chinese Yuan either as the size of it is, obviously, too large.
A number of economists and analysts claim that in a five years' period China is going to make its currency much more convertible internationally than nowadays. However, it is quite difficult to achieve such a goal, as it is hard to predict when China will do that and how far it will go. China may attempt to make Yuan convertible, but it may also impose some constraints. Nobody knows about the constraints yet, even the Chinese government. Nevertheless, the whole direction is moving towards convertibility.
I assume that one thing that has been holding China is the current global situation and environment. It is quite risky to implement any new tactics and it is considered better to stay on the safe side. I suppose that China may wish to slow down about this decision, wait and see.
I believe that if China succeeds in making Yuan more convertible, it will certainly be beneficial to the world as that would add one more currency which should be relatively stable and attractive for people to keep it in their investment portfolio. Furthermore, if China accomplishes it within these five years, it will still take quite a bit of time for China to build-up its reputation of safe and reliable monetary policies. The investors will wait and see whether the Central Bank of China has been adopting critical monetary policies. If they see it, they might start holding more Yuans in their portfolios. As I mentioned, this certainly won't happen overnight, but within a couple of years.
*M2, M3 - Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M3 equals M2 plus large and long-term deposits.