RMB Internationalization Could Soon Get Major Boost as Desperate EU Looks to Bail Out Financial System with Yuan Bonds

by Kenneth Schortgen, The Daily Economist:

After a modicum of success in expanding the RMB’s use outside of China when their currency became accepted into the IMF’s SDR basket of currencies last year, the Yuan has since seen a slowdown for internationalization due in part from capital controls they instituted to try to restrict a growing occurrence of capital flight. But in an interview given on March 5 by the head of the European Stability Mechanism (ESM), that may soon be changing as the financial body responsible for protecting the stability of the Eurozone suggested that the next round of ‘Quantitative Easing’ may involve bonds denominated in Yuan as the foundation for bailing out banks and other financial institutions.

The head of the organization charged with safeguarding financial stability in the eurozone said he does not rule out issuing Chinese yuan-denominated bonds to fund the rescue of European nations and institutions.

“[Issuing European Stability Mechanism bonds in yuan] is possible,” Klaus Regling, managing director of the ESM, said in a recent interview with the Nikkei Asian Review. He said the institution was preparing to issue dollar-denominated bonds in the fourth quarter of this year — the ESM’s first non-euro bond issuance — but added that other currencies remained an option.

“We are legally allowed to issue in all currencies,” he said. “As a young institution, it is a big step to do our first non-euro issue … and it seems to make sense from the market side to start with the U.S. dollar. But it is entirely possible that we move into other currencies that are attractive from the market side.” – Asia.Nikkei

The European Stability Mechanism (ESM) is Europe’s equivalent of the U.S.’s Exchange Stabilization Fund (ESF) in that it acts as a neutral party, able to step in and fill any monetary needs for the financial system.

If the EU is now looking towards the Chinese Yuan as a much better asset and currency to sell to fund and bailout European financial institutions in the future, then this will go an extraordinarily long way in fulfilling China’s goal of internationalizing the Yuan, and moving it towards becoming an equal shareholder with the dollar as one of the world’s primary reserve currencies.

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