Though China faces some challenges related to exchange rates and economic growth this year, partly due to external uncertainties, its importance in the global economy remains unchanged, especially at a time when the world is undergoing a reconfiguration in supply chains and capital flows, according to a senior executive at a global asset manager.
Expecting the Chinese currency renminbi to depreciate slightly against the US dollar to about 7.6 this year, Massimiliano Castelli, head of global strategy in global sovereign markets at UBS Asset Management, said the additional tariffs likely to be imposed on China after US President Donald Trump took office, as well as the US Federal Reserve's policies, may affect the yuan's exchange rate.
But a stronger greenback will put pressure on the exchange rates of all currencies, Castelli said.
China is, however, keen to maintain stability in the exchange rate and provide more monetary stimulus in 2025. The country is likely to cut the reserve requirement ratio by 30 to 40 basis points, he said, quoting a UBS forecast.
"The country will also introduce more policies to support domestic investment and household consumption this year as consumption will play a bigger role in China's economic growth," he added.
According to Castelli, the internationalization of the renminbi, which has been advancing for years, has been undergoing some slowdown since 2023, mainly due to the falling interest rate differential with the US dollar, concerns about China's ability to overcome current economic challenges and the sanctions risk implied in geopolitical tensions.
However, Castelli also pointed out that according to the latest survey by UBS Asset Management on sovereign institutions, the average long-term target allocation to renminbi across all central banks in the world remains unchanged at around 5 percent.
Some central banks are still allocating to renminbi fixed-income products. As soon as China resolves its economic issues and the geopolitical situation stabilizes, an increase in the share of FX reserves allocated to the renminbi will eventually resume, he said.
The construction of a payment system is crucial to the cross-border use of the renminbi, including the e-CNY, according to Castelli.
"If China, together with all the major markets, is able to develop a payment system that is as reliable as the one which exists at the moment in the Western world, the wider use of the e-CNY can definitely become an accelerator of yuan's internationalization," he said.
On expressions of de-globalization, Castelli believes there is a little bit of exaggeration, as the size of international trade can provide little clue of an end to globalization.
The world's real economy has changed and the weight of emerging markets has increased dramatically over the last few decades: the share of emerging markets in global GDP has increased from about 20 percent in 1990 to over 40 percent in 2024, he said.
In the past, the Middle East and Asia had significant current account surpluses by exporting a large amount of oil and manufactured goods. This surplus was largely invested in the bond markets of the United States and Europe. This resulted in a mostly one-way capital flow: from the developing markets into the Western world, he said.
But this model is changing. Domestic investments and investment in renewables around the world have become alternatives to Western bond markets. Therefore, the Western world will have to be more careful about the sustainability of attracting capital inflow, he said.
At the same time, emerging economies have played a bigger role as a capital importer than an exporter. For example, countries like the United Arab Emirates and Saudi Arabia have launched economic reforms and regulatory changes to create more business opportunities within their markets.
"The emerging markets can become important drivers of capital flows between them rather than just from emerging market to advanced economy. China is definitely a big player in that, given its size and importance in the global economy," he said.
