April 29th, 2009 | Caijing Yuan To Become Regional Currency Before Going Global
After becoming a settlement currency, the next logical step would be for the yuan to become a regional reserve currency.
The yuan is likely to become a regional currency because of China’s expanding trade links with the region before it gains acceptance as an international reserve currency, Cailing chief economist Shen Minggao and economist He Yin said.
As a major importer of raw materials from Southeast Asia, China has bargaining power over prices and settlement methods, Sheng and He said. To ensure access to China’s steadily growing markets, these countries may have to settle their transactions in yuan, the economists wrote in a weekly review on April 27.
The yuan is expected to gain popularity as a regional currency as China expands trade with Taiwan, Hong Kong and Macau, they wrote.
China’s trade already surpasses Japan’s in the region. After becoming a settlement currency, the next logical step would be for the yuan to become a regional reserve currency.
However, the yuan is still two decades away from being fully convertible, the economists wrote, because China’s financial system is not yet open enough, its financial institutions not competitive, and its financial markets lack adequate scale.
To accelerate marketization of the yuan while avoiding major currency speculation, both economists said now is the time for exchange rate reform.
They also suggested that the central bank widen the daily trading band of the yuan against the US dollar, now capped at 0.5 percent per day.
China is running a pilot program involving Shanghai and four southern Chinese cities which will settle trade in yuan with Hong Kong and Macau. A separate pilot project involving southwestern provinces and regions will use the yuan to settle trades with Southeast Asia.
By staff reporter Wang Jing