New move takes yuan closer to global status

On April 8, China's State Council made the latest move in making the Chinese yuan an international currency. The Council announced that the yuan can be used in overseas trade settlement in five cities - Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan.

It followed a trial run last December of using the yuan to settle deals between the Pearl River Delta and the Yangtze River Delta provinces and Hong Kong and Macao, as well as between Guangxi Zhuang Autonomous region, Yunnan province and the Association of Southeast Asian Nations (ASEAN).

In addition to currency swap deals that China recently signed with neighboring countries and Latin American countries, this latest move is part of China's strategy to make the yuan a fully convertible currency.

The global financial crisis has exposed the innate deficiency of the current international monetary system.

There is no role model for China to follow. Unlike the US and Europe, whose currencies serve as major reserve currencies, China has more constraints in turning the yuan into a global currency and it will take a unique path to do so.

Historically, the British pound rose to an international currency in the 19th century because of the British Empire and London's status as an international financial center. As the US replaced Britain as the only superpower in the world, the greenback became a global reserve currency after the Bretton Woods agreements.

The euro made its debut on the international stage in 1999 with the economic and political integration of the European countries. These avoided the risks of exchange rate fluctuations in international trade and grabbed the leading position in the international financial order.

In contrast, the Japanese yen had a much more difficult path in becoming a global currency, even though Japan played an important role in international trade. Only a small proportion of Japan's foreign trade deals are in yen, and even trade with other East Asian countries are settled in US dollars. Like China, Japan has plenty of US dollar in hand, and is also facing the risk of the depreciation of the dollar.

The ultimate goal for the yuan becoming a global currency should not be monetary empire building, but to eliminating the risk of exchange rate fluctuations. Using the yuan to pay for trade with regional economies will lay a foundation for wider use globally.

We should also never underestimate the difficulties and risks of taking the yuan global. Some countries have welcomed the use of the yuan in cross-border trade settlements, but there are still many difficulties to overcome.

Once the yuan develops into a global currency, China's political and economic climate will become key indicators that will have an effect on international financial activities. In a sense, the yuan's becoming global will add more pressure on China's economic development. Nevertheless, it will bring more benefits than costs, and we should move boldly.

The transformation of the yuan into a global currency will not occur overnight, but we have taken an important step toward realizing that goal.

The author works with Qushi Hongguan research company. The article was reprinted from Securities Times

(China Daily 04/20/2009 page2)