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Beijing Warily Opening Door for Yuan to Become International Currency

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littlekracker


Beijing Warily Opening Door for Yuan to Become International Currency
August 25, 2010

China is stepping up efforts to increase the use of the yuan abroad as the nation seeks to reduce its exposure to the United States dollar and allow its currency to take on a greater global role, analysts say.

Since the financial crisis, the world’s largest holder of foreign exchange reserves has been diversifying its investments away from the greenback and pushing both investors and companies to use the yuan to stem the inflow of dollars.

“The 2008 credit crisis underscored to China that settling in yuan would reduce the country’s exposure to the type of United States dollar-liquidity shock that was an important reason for the subsequent collapse in trade,” Royal Bank of Scotland analysts Ben Simpfendorfer and Erik Lueth said.

Despite the global success of Chinese exporters, the yuan plays only a minor international role because it cannot be freely exchanged for other currencies.

And official controls make it difficult to move the yuan in and out of China.

While top leaders want to see the yuan adopted as a global reserve currency to reflect China’s growing economic and political clout, analysts say they will stop short of relinquishing control amid fears that it could destabilize the economy — and result in the yuan strengthening against the dollar too quickly.

“They are petrified about inflows and outflows — it’ the Asian financial crisis mentality,” said a Beijing-based analyst who asked not to be named.

Simpfendorfer agreed. The reforms “are moving much faster than people expected but it will slow down at the point at which China believes it is producing volatile capital flows,” he said.

In the past two years, China has pushed for greater use of the yuan abroad, signing currency swap arrangements with several nations and launching trials for yuan trade settlement with a number of mainly Southeast Asian countries.

In the latest move, authorities said last week they would further open China’s interbank bond market to foreign investors, in the hope of encouraging more companies to use the yuan instead of the dollar to settle trade deals.

Analysts said the move would give overseas companies an incentive to accept yuan as payment for goods sold to China, and encourage the development of yuan-denominated financial products in Hong Kong.

China’s “qualified foreign institutional investor” program — launched to allow foreigners to invest in yuan-denominated equities — has allowed limited access to the interbank bond market since 2005.

“The more yuan you get outside the country and the more the yuan is issued as a settlement currency, the more you can talk about reducing your currency risk and your dependence on any individual currency,” said the Beijing-based analyst.

Earlier this year, China announced that banks based in Hong Kong would be allowed to transfer yuan among themselves for corporate customers, cautiously opening the door to the sale of yuan-denominated financial products.

Fast food giant McDonald’s has become the first non-financial company to take advantage of this measure, announcing last week that it would issue almost $30 million worth of yuan-denominated bonds in Hong Kong.

But while China is stepping up yuan reforms, the measures “stop short of full liberalization and are not the ‘big bang’ reforms often argued for”, Simpfendorfer and Lueth said.

However, obstacles still stand in the way of the yuan becoming a true international currency to rival the dollar, euro or yen — most notably Beijing’s reluctance to give a freer hand to speculators by letting the yuan become fully convertible.

Another hurdle is the yuan’s scarcity overseas owing to China’s ballooning trade surplus.

“ It is very difficult to earn enough of it because it is constantly being sucked back into China,” said Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing.

China has the world’s largest foreign currency reserves, worth $2.45 trillion, including $843.7 billion invested in United States Treasury debt at the end of June.

But China has more than doubled its holdings of South Korean government bonds in the past six months, and is also acquiring more Japanese debt. 

Guest


Guest
the yuan plays only a minor international role because it cannot be freely exchanged for other currencies.

1. Nobody wants a UNDERVALUED currency

2. China is a spoil butthead brat!!

Guest


Guest
China has more than doubled its holdings of South Korean government
bonds in the past six months, and is also acquiring more Japanese
debt. 


How much Gold does these two countries have...and does south korean have a gold mine???

windreader1


The more they open up their country to interaction with the rest of the world the harder it is to control their people, this is still a communist state

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