MercoPress. South Atlantic News Agency

China’s central bank assesses steps to make the Yuan a global currency

China must create more channels for investors and companies to use the Yuan if it wants to internationalize the currency and put it on a par with the Yen and the Euro, central bank officials and economists told a forum in Shanghai.

The world’s biggest holder of foreign-exchange reserves also needs to loosen controls on the use of the Yuan for investment and trade outside China, Xie Duo, director of the financial market department of the People’s Bank of China, and Li Daokui, an adviser to the central bank, said.

China, the world’s third-largest economy, is seeking to reduce its reliance on the US dollar and promote the Yuan as a global currency. The central bank this week expanded the use of the Yuan for cross-border trade settlement to 18 more provinces, allowing companies based in areas including Beijing and the export hubs of Jiangsu and Zhejiang to use the currency to pay for goods and services.

“It will take a very long time to realize the internationalization of the Yuan” said Xie. “It won’t be easy, but China can boost the use of the Yuan due to rising demand from foreign trade companies. We will also offer channels for companies and financial institutions abroad, especially in Hong Kong to invest the Yuan within China.”

Allowing more trade to be settled in Yuan isn’t enough, said Li Daokui, one of three academics who sit on the central bank’s monetary policy committee.

“After foreigners get hold of the Yuan what are they going to do with it?” Li told the forum. “The government needs to gradually open investment channels for foreign investors so that the Yuan can be used in more transactions outside China and flow back to China.”

Li and Xie said Hong Kong would play an important part in boosting the Yuan’s international role, becoming the main offshore market for the currency.

“We are encouraging the Hong Kong monetary authority and financial institutions to develop such instruments” to satisfy demand for investment channels for the Chinese currency, Xie Duo said.

“Over 10 to 15 years, we may see the Yuan gradually becoming a global currency that has similar influence with the Yen, US dollar, pound and the Euro in international markets,” said Li, who is also director of the Center for China in the World Economy at Tsinghua University in Beijing.

China allowed money to flow freely in and out of the country for trade in goods and services in 1996 although it still restricts the flow of capital for investment purposes. Central bank governor Zhou Xiaochuan said in November that the global financial crisis had paused efforts to make the Yuan more convertible on the capital account.

The government has put limits on most of the measures it has announced to try and internationalize the Yuan, such as the qualified foreign institutional investor, or QFII, program, Xie said, referring to arrangements for some foreign institutions to invest in China.

The government’s ownership of the financial system through its control over the nation’s banks is another obstacle to achieving internationalization of the currency, the economist said.

China’s financial markets are not strong enough to cope with the large capital flows that convertibility involves, Xie said. The financial system needs to be privately owned and more market based, he said.

“Before this, any talk about the internationalization of the Yuan and its replacing the dollar would be premature,” Xie said.

Last Friday China's central bank set the strongest Yuan exchange rate in years as the Chinese currency hit a 17-year high amid international pressure for its appreciation.