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Tuesday 31 March 2009
Yuan as Asia’s reserve currency?
‘It is highly unlikely that the yuan can become the dominant currency in Asia. In five, 10 years, it may indeed become a major reserve currency - but along with the dollar and euro,’ said Mr. Lu.
BEIJING: A week after his banker floated the idea of a new ‘super currency’, Chinese President Hu Jintao will arrive in London this week with the Chinese yuan very much in the limelight.
Chinese central bank governor Zhou Xiaochuan’s call for a new global reserve currency in place of the US dollar is a long shot for now, say some analysts.
But the possibility of the Chinese yuan replacing the greenback in Asia may be a less distant one, they point out.
Concerns are spreading that the crisis-hit United States may finance its massive stimulus package by printing money, thus debasing the dollar and dollar-denominated assets.
So it is hardly surprising that China and other Asian countries are exploring the possibility of searching for an alternative reserve currency that will better serve their interests.
Mr. Zhou had proposed that the International Monetary Fund’s scope be broadened by allowing the Special Drawing Rights (SDRs), a basket of major currencies, to be used as the new reserve currency instead of the dollar.
But analysts have read his comments to mean that China wants it all: Internationalising the yuan, making the yuan part of the basket of currencies in the SDR and turning Asia into ‘a yuan bloc’.
Among the three, popularising the yuan as Asia’s reserve currency appears to be the most straightforward scenario in the coming years as intra-regional trade flows grow and China’s role in Asia’s financial and economic stability becomes increasingly vital, say analysts.
Mr. Ben Simpfendorfer, an economist at the Royal Bank of Scotland, noted that a ‘de facto adoption of the yuan as an Asian currency unit’ may take place amid a ‘global rebalancing’ of trade flows.
‘A Korean firm, for instance, will increasingly sell to a Chinese buyer rather than an American buyer as Chinese domestic demand strengthens,’ he said.
OCBC economist Selina Ling said: ‘With the increasing importance of intra-regional trade in Asia, it makes sense not to be tied down to an ‘external’ currency.’
She noted that the current climate is ‘very volatile’ for trade in Asia due to the fears about a possible debasement of the US dollar.
‘Using the yuan, rather than some other Asian currencies, as a reserve currency makes sense. You want the currency to be reflective of a large trading partner,’ she said.
For some countries bordering China that have very strong bilateral trade ties, the yuan is already effectively a reserve currency, pointed out Mr. Lu Ting, a Merrill Lynch economist.
But ‘it will take some time’ for other major Asian countries to view the yuan as a key reserve currency, he said.
Still, some large Asian markets such as South Korea, Indonesia and Malaysia have already jumped on the bandwagon.
They are among five Asian countries that have signed currency swap agreements with China recently, allowing them to pay for Chinese imports in yuan rather than the US dollar.
Since late last year, China has set up currency swap lines totalling 650 billion yuan (S$114.87 billion) with seven countries, the latest of which was a 70 billion yuan agreement with Argentina signed yesterday.
The next steps China may take to regionalise the yuan could include the issuance of so-called yuan denominated ‘panda bonds’ as well as the large-scale settlement of trade between China and its Asian partners in yuan.
Since last year, Asean members have been allowed to use the yuan in their trade with the south-west China provinces of Guangxi and Yunnan.
The current global financial crisis has added fresh impetus to China’s desire to make the yuan a dominant currency in Asia, as this could boost trade and support its struggling exporters, noted Mr. Simpfendorfer.
However, until the yuan is made fully convertible - which would allow countries to hold it as part of their reserves and to buy and sell it freely - the US dollar will still remain the dominant currency.
So far, Beijing has not indicated that it will do so any time soon because liberalising its currency too quickly may open its economy to sudden disruptive shifts in capital, and that may induce destabilising hot flows of money.
Analysts say opposition from countries such as Japan, South Korea and Asean members wary of China’s geopolitical ambitions to dominate Asia may also block the yuan from having too much influence on their economies.
‘It is highly unlikely that the yuan can become the dominant currency in Asia. In five, 10 years, it may indeed become a major reserve currency - but along with the dollar and euro,’ said Mr. Lu.
1 comment:
Yuan as Asia’s reserve currency?
By Grace Ng
31 March 2009
BEIJING: A week after his banker floated the idea of a new ‘super currency’, Chinese President Hu Jintao will arrive in London this week with the Chinese yuan very much in the limelight.
Chinese central bank governor Zhou Xiaochuan’s call for a new global reserve currency in place of the US dollar is a long shot for now, say some analysts.
But the possibility of the Chinese yuan replacing the greenback in Asia may be a less distant one, they point out.
Concerns are spreading that the crisis-hit United States may finance its massive stimulus package by printing money, thus debasing the dollar and dollar-denominated assets.
So it is hardly surprising that China and other Asian countries are exploring the possibility of searching for an alternative reserve currency that will better serve their interests.
Mr. Zhou had proposed that the International Monetary Fund’s scope be broadened by allowing the Special Drawing Rights (SDRs), a basket of major currencies, to be used as the new reserve currency instead of the dollar.
But analysts have read his comments to mean that China wants it all: Internationalising the yuan, making the yuan part of the basket of currencies in the SDR and turning Asia into ‘a yuan bloc’.
Among the three, popularising the yuan as Asia’s reserve currency appears to be the most straightforward scenario in the coming years as intra-regional trade flows grow and China’s role in Asia’s financial and economic stability becomes increasingly vital, say analysts.
Mr. Ben Simpfendorfer, an economist at the Royal Bank of Scotland, noted that a ‘de facto adoption of the yuan as an Asian currency unit’ may take place amid a ‘global rebalancing’ of trade flows.
‘A Korean firm, for instance, will increasingly sell to a Chinese buyer rather than an American buyer as Chinese domestic demand strengthens,’ he said.
OCBC economist Selina Ling said: ‘With the increasing importance of intra-regional trade in Asia, it makes sense not to be tied down to an ‘external’ currency.’
She noted that the current climate is ‘very volatile’ for trade in Asia due to the fears about a possible debasement of the US dollar.
‘Using the yuan, rather than some other Asian currencies, as a reserve currency makes sense. You want the currency to be reflective of a large trading partner,’ she said.
For some countries bordering China that have very strong bilateral trade ties, the yuan is already effectively a reserve currency, pointed out Mr. Lu Ting, a Merrill Lynch economist.
But ‘it will take some time’ for other major Asian countries to view the yuan as a key reserve currency, he said.
Still, some large Asian markets such as South Korea, Indonesia and Malaysia have already jumped on the bandwagon.
They are among five Asian countries that have signed currency swap agreements with China recently, allowing them to pay for Chinese imports in yuan rather than the US dollar.
Since late last year, China has set up currency swap lines totalling 650 billion yuan (S$114.87 billion) with seven countries, the latest of which was a 70 billion yuan agreement with Argentina signed yesterday.
The next steps China may take to regionalise the yuan could include the issuance of so-called yuan denominated ‘panda bonds’ as well as the large-scale settlement of trade between China and its Asian partners in yuan.
Since last year, Asean members have been allowed to use the yuan in their trade with the south-west China provinces of Guangxi and Yunnan.
The current global financial crisis has added fresh impetus to China’s desire to make the yuan a dominant currency in Asia, as this could boost trade and support its struggling exporters, noted Mr. Simpfendorfer.
However, until the yuan is made fully convertible - which would allow countries to hold it as part of their reserves and to buy and sell it freely - the US dollar will still remain the dominant currency.
So far, Beijing has not indicated that it will do so any time soon because liberalising its currency too quickly may open its economy to sudden disruptive shifts in capital, and that may induce destabilising hot flows of money.
Analysts say opposition from countries such as Japan, South Korea and Asean members wary of China’s geopolitical ambitions to dominate Asia may also block the yuan from having too much influence on their economies.
‘It is highly unlikely that the yuan can become the dominant currency in Asia. In five, 10 years, it may indeed become a major reserve currency - but along with the dollar and euro,’ said Mr. Lu.
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