Yuan gaining currency beyond China
By Russell Hsiao
Since December 2008, China has signed 650 billion yuan (US$95 billion) in
currency-swap agreements with Indonesia, Malaysia, South Korea, Hong Kong,
Argentina and Belarus, in order to promote greater circulation and
convertibility of the Chinese currency (also referred to as the renminbi).
Thailand is reportedly studying a possible currency swap agreement with China
that would make it easier for their exporters to settle trade in the two
currencies. According to experts, the increased regional use of the yuan for
"invoicing, transaction and settlement purposes" could enhance its use as a
"store of value".
The global financial crisis has prompted Beijing to hedge the weakening US
dollar by encouraging the regionalization of the
yuan as a settlement currency for trade and other current account transactions
in Asia, and bypassing the use of the US dollar.
An article by People's Bank of China (PBoC) governor Zhou Xiaochuan on March
2009, which called for an international reserve currency to take the place of
the US dollar, created a whirlwind of debate within China's policy circles, and
the international community, about the future role of the yuan. While the
regional use of the yuan is spreading, analysts have emphasized that it is
"usually at the expense of the US dollar as transaction currency, not as
reserve currency".
According to Zhang Yuyan, the head of the Institute of Asia-Pacific Studies at
Chinese Academy of Social Sciences - one of China's leading government think
tanks - "A favorable balance of trade with China is a prerequisite for
surrounding nations to use the yuan as a reserve currency". China has replaced
the United States as the main export market for Asian countries, and as the
current pace of China's investments exceeds the growth in its savings there is
a possibility that the current account surplus may become a deficit by 2010.
The use of the yuan in China's neighboring countries for transactions has been
growing in recent years (for example in northern Thailand, northern Vietnam,
Myanmar and eastern Russia) since it is cheaper and simpler for smaller traders
to use than the US dollar. In order to monitor these transactions, the PBoC,
Vietnam and Laos recently signed bilateral settlement cooperation agreements,
which according to Su Ning, the new vice president of the Bank of China, will
enhance the fledgling financial regulatory mechanisms in the sub-region.
Su made this statement on October 20 at the "China-ASEAN Financial Cooperation
and Development Leaders Forum," held in conjunction with the Sixth China-ASEAN
Expo that took place from October 20 to 24 in Nanning, Guangxi Zhuang
Autonomous Region.
Su pointed out that China-ASEAN financial cooperation has made considerable
progress in recent years, and by the end of 2008, China and Thailand,
Philippines, Malaysia and Indonesia and other countries had signed
currency-swap agreements with a net worth of more than $230 billion. The
central banks of every ASEAN country reportedly sent a representative to attend
the forum. The 10 ASEAN members are Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Su stated that the PBoC's next step will be to encourage ASEAN countries'
financial institutions to establish branches of operations in China, or invest
in Chinese financial institutions, and therefore expand the scale of a fund for
greater Asian bonds, and promote the development of an Asian bond market.
Xia Bin, president of the Financial Research Institute of the Development
Research Center of the State Council - the Chinese government's executive
branch - stated that "China is not pursuing the optimum target of complete
internationalization of the yuan, but a suboptimal one: gradual regionalization
of the currency". The push for the regionalization of yuan appears to be
gathering steam ahead of the scheduled launch of the China-ASEAN Free Trade
Area (CAFTA) on January 1, 2010.
Under the terms of CAFTA, there will be zero-tariff for 90% of the products
traded between China and ASEAN countries and "substantial opening" in the
service trade market. According to some estimates, the total trade between
China and ASEAN members could reach $4.5 trillion once the FTA is launched. The
launch of CAFTA will provide momentum for broader regional growth and may
facilitate a decoupling from the West, as the yuan plays a more prominent role
in the regional economy.
Prior to the financial crisis, the Chinese government did not appear to have a
policy on the convertibility of the yuan. Yet the raft of yuan-denominated
lines of credit extended to neighboring countries and bilateral local currency
swaps that have been signed in recent months demonstrate a far-sighted Chinese
stake in increasing the convertibility of the yuan. Moreover, CAFTA would serve
as a platform to accelerate the regionalization of the currency.
Russell Hsiao is the editor of China Brief at The Jamestown Foundation.
(This article first appeared in The Jamestown
Foundation. Used with permission. Copyright 2009 The Jamestown
Foundation.)
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