China to allow all trades to settle in yuan, encourages use as reserve currency

 
on March 02 2011 11:19 AM

China aims to allow all exporters and importers to settle cross-border trades in the yuan by 2011, according to the Chinese central bank, reported Reuters.  

Moreover, China will “respond to overseas demand for the yuan to be used as a reserve currency” and allow the yuan to flow back into China more easily.

This is all part of China’s plan for the internationalization of its currency, which may, in the decades to come, threaten the global ‘market share’ of other currencies like the US dollar.

Previously, China also announced that bilateral trades with Russia and Malaysia will begin to be conducted with the yuan and the ruble and ringgit, respectively.

Other moves on the part of China to internationalize its currency include allowing foreign companies to issue yuan-denominated bonds and relaxing rules for foreign financial institutions to access the yuan.

Aside from the efforts of the Chinese government, fundamentals also point to the increasing international popularity of the Chinese currency.

China is already the leading trade partner with Australia and Japan. It’s also the leading or a large trade partner with many of its smaller neighbors. The purpose of having foreign currencies is to conduct foreign trade and investment, so the yuan is expected to become a more attractive currency for China’s trade partners, espeically as the government continues to relax restrictions.

Currently, the yuan is not that popular globally; the US dollar is the leading international currency, followed by the euro, pound sterling, and the yen. However, for the fundamental reasons described above, the yuan is expected to make a dent in the ‘market shares’ of these currencies in the coming years.

What’s the advantage having an international currency?

For one, it makes it easier to become an international financial hub, which brings a whole host of advantages to a country. Two, it gives the country and its companies easy access to international capital.

Email Hao Li at hao.li@ibtimes.com

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