China is beginning a campaign to raise the role of the yuan in international trade and finance and reduce reliance on the American dollar, according to observers in Beijing.
If successful, the yuan would become one of the three biggest global currencies.
Although the observers identify a growing consensus in Beijing for making the currency international, they also believe that there are deep divisions over the ultimate implications: some do not want the Government to lose control of foreign exchange rates by letting the yuan float freely, and fear a loss of control over interest rates.
The currency depegged from the dollar in 2005 and floats in a narrow band of 0.5 per cent around a basket of currencies dominated by the greenback. Internationalising the yuan would slow China’s dollar accumulation, which has been growing at $334 billion (£204 billion) a year since 2005. However, the process is likely to be long and gradual, though analysts at HSBC believe the pace is likely to be faster than many expect, given China’s position as the world’s third-biggest economy.
At first, the plan is to expand the yuan’s role in settling cross-border trade. Some economists believe this could lead to nearly $2,000 billion in annual trade flows — half of China’s current total — being settled in this way by 2012.
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One effect would be to transform Hong Kong into an offshore yuan trading centre. The internationalisation is likely to start close to home and then broaden out, with an initial focus on countries that supply China with raw commodities and buy its goods.
Chinese exporters and importers have to rely on the dollar for invoicing their foreign trade. The Chinese Government has launched a scheme that would allow yuan-denominated trades between Hong Kong and five cities on the mainland.
To encourage similar “acclimatisation”, the People’s Bank of China has signed a total of 650 billion yuan (£58 billion) in bilateral currency swap agreements with six central banks in South Korea, Hong Kong, Malaysia, Indonesia, Belarus and Argentina.
If the yuan is widely accepted for trade settlement, phase II will be expanding its role in international investment, but this would take years. The move would make Chinese exporters and importers more competitive.