China will use the yuan in transactions with neighbouring economies on a trial basis, as a potential first step to making it an international currency.
BEIJING: China will use the yuan in transactions with neighbouring economies on a trial basis, state media said on Thursday, calling it a potential first step to making it an international currency.
The government will allow the yuan to be used in settlements between the Pearl and Yangtze river delta regions — both major industrial areas — and Hong Kong and Macau, the China Daily reported. Similarly, southwest China’s Yunnan province and the Guangxi Zhuang region in the south will be permitted to use the yuan to settle trades with members of the Association of Southeast Asian Nations (Asean).
The initiative emerged from a meeting on Wednesday of the state council, or cabinet, but no details were available when it would be implemented. “The move will... increase the yuan’s acceptance in Asia, which will help it to become an international currency in the long run,” Zhao Xijun, a finance professor at the People’s University in Beijing, told the paper.
The vast majority of China’s foreign trade deals are currently settled either in euros or US dollars.
In 2007, China’s trade with Hong Kong, Macau, and the 10 Asean member countries amounted to nearly $403 billion, about 20% of the country’s overall foreign trade.
“The yuan settlement trial... is an important step for China towards internationalising its currency,” said Lu Zhengwei, a Shanghai-based economist with Industrial Bank. “But it’s still in the infancy stage, and China will need to take other measures to facilitate its development, such as maintaining a stable exchange rate between the dollar and the yuan.”
Chinese central bank governor Zhou Xiaochuan had warned earlier this month that settlements using the dollar would be a problem if the dollar’s value changed drastically. There has been growing pressure over the past year within China to make the yuan an international currency, but the government has so far been cautious as it would require making it fully convertible, the paper said.
The yuan is not yet convertible on the capital account, meaning funds cannot freely enter the country for purposes such as investment in stocks or real estate. The government is worried that liberalising this type of funds flow would make the economy more
vulnerable during times of regional or global turmoil.
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