BEIJING Moves to control capital outflows and concerns over a potential further depreciation of the yuan are likely to impede the internationalization of Chinese currency, Fitch credit rating agency 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 internationalization 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 yuan fell to 1.8 percent in March 2017 from 2 percent 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 percent from 3 percent.
About 17 percent of China's trade deals were settled in the yuan in 2016, off a peak of 26 percent hit in 2015 and 22 percent in 2014, according to Reuters' calculations based on official data.
Yuan settlements were close to zero in 2009, when internationlization was seen as a way for firms to reduce currency risks and also to challenge the U.S. dollar's role as the world's major reserve currency.
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 1 percent, or $84.51 billion.
Policy stimulus has stabilized 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 CNY=CFXS has stabilized this year, due to curbs on capital outflows and a reversal of the dollar rally, following a fall of 6.5 percent in 2016. Still, it is widely expected to weaken further versus the dollar this year.
The Chinese authorities are unlikely to pursue significant capital account liberalization 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.
(Reporting by Kevin Yao; Editing by Simon Cameron-Moore)