Use local currencies in China's Silk Road initiative for financial stability - central bank officials

SHANGHAI (Reuters) - The use of local currencies instead of the U.S. dollar or other major currencies in China’s Belt and Road initiative will help to ensure financial stability, officials at China’s central bank said this week.

People take pictures of the "Golden Bridge on Silk Road" installation by artist Shu Yong, set up ahead of the Belt and Road Forum in Beijing, China May 10, 2017. REUTERS/Thomas Peter

Transacting in the currencies of countries along the Silk Road route will gradually reduce dependence on major currencies and lower the risks of exchange rate fluctuations, said Zhou Xiaochuan, governor of the People’s Bank of China.

“Increasing the use of local currencies will gradually enhance confidence and raise attractiveness of the local currencies,” Zhou wrote in an article published in the central bank’s China Finance magazine this week.

In an interview with People’s Daily published on Thursday, the central bank’s vice governor Yi Gang said using local currencies would also reduce the cost of foreign exchange conversion.

“Investment and financing in local currency can fully mobilise resources of local savings,” Yi said.

China has signed local currency swap agreements with 21 countries along the Belt and Road initiative, he added, and six countries have received investment quotas to participate in the Renminbi Qualified Foreign Institutional Investor (RQFII) programme.

Analysts said the Belt and Road initiative would be an important step toward promoting yuan internationalisation as trade activities would increase use of the yuan, also known as the renminbi.

“China will resume the opening up of its capital account and encourage outward direct investment,” Ken Cheung, Asian FX strategist at Mizuho Bank in Hong Kong, said.

“In this way, the capital outflow controls should be regarded as temporary measures to contain RMB depreciation pressure.”

Leaders of 28 nations will gather in Beijing between May 14-15 for the Belt and Road summit to map out China’s ambitious new Silk Road project - a development strategy that aims to expand links between Asia, Africa and Europe.

Reporting by Winni Zhou and John Ruwitch in Shanghai; Kevin Yao in Beijing; Editing by Jacqueline Wong