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Commercial Times: Internationalization of the Chinese yuan

Commercial Times: Internationalization of the Chinese yuan

The role of China's currency, which used to be called the renminbi (people's money) and is now the yuan, has been growing along with China's economic might. China's confidence on the diplomatic and economic fronts has evidently been boosted in the wake of the 2008 global financial crisis. In 2009, China's State Council announced that it would try to turn Shanghai into an international financial center, commensurate with the strength of yuan, by 2020. China has since been adopting measures toward that goal. However, it remains to be seen whether the Chinese yuan will be effectively internationalized. When a currency is internationalized, it can be examined from three perspectives: how often it is used in international trade, how big a share it has as the unit of financial transactions, and whether it is held as foreign exchange reserves. The U.S. dollar is the most internationalized currency, with 85 percent of the foreign exchange trade in the world conducted in that currency. It accounts for 65 percent of the foreign exchange reserves of the world. One rewarding outcome of China's efforts to internationalize its national currency is the establishment of an offshore settlement center in Hong Kong, which also issues yuan bonds -- called dim sum bonds after Hong Kong people's favorite food. The bonds can be used for investment in China. Within two years, China has achieved 10 percent of its foreign trade in its own currency, which amounts to US$300 billion. By 2012, the figure could reach 15 percent. China and Japan have agreed to use their respective currencies in bilateral trade, 60 percent of which is currently calculated in U.S. dollars. The China-Japan agreement will surely boost the yuan's international status and encourage more countries to do the same in trade with China. But one drawback to the yuan's rapid internationalization is the anticipation of its appreciation. This has prompted speculation because China's trade partners are keen to keep their yuan income in Hong Kong, while importers in these countries do not have any incentives to do so. As importers continue to use the U.S. dollar and exporters continue to keep their yuan income in Hong Kong offshore centers, the reserves of yuan have been piling up. Meanwhile, China's foreign exchange reserves -- mostly in the U.S. unit - are growing at an abnormal speed. This runs exactly counter to Beijing's attempt to shed reliance on the U.S. dollar as China has to release yuan in an amount equal to that kept by traders in Hong Kong, which will eventually increase inflationary pressure in China. One major reason for China's dilemma is that it thinks conditions are not yet ripe to allow free conversion of its currency in the short term or even in the midterm. If China allows the free conversion of the yuan into foreign currencies and vice versa, Chinese authorities will lose their tight control over the exchange rates. Therefore, Hong Kong is just being used as an experiment in China's grand plan to internationalize its currency. It also remains to be seen how that experiment will affect Hong Kong's economy. (Editorial abstract-- Jan. 8, 2011) (By S.C Chang)


Updated : 2021-02-26 10:03 GMT+08:00