As US dollar's role as international currency was questioned over the global financial crisis, China began its long-awaited initiative to trade with yuan as a step toward reducing China's reliance on the dollar.
China's yuan trade pilot scheme kicked off on July 6 as three Shanghai companies completed cross-border trades with yuan. The three deals in total were valued at 14.38 million yuan.
Their actions followed the government's announcement of new rules allowing selected companies in Shanghai and in four cities in Guangdong province to use yuan to settle international trade accounts on a trial basis.
According to these rules, the companies can use yuan, instead of the dollars currently used, to settle trade accounts with merchants in Hong Kong, Macao and Association of Southeast Asian Nations (ASEAN ).
Since the exchange rates of major settlement currencies such as dollars and euro were volatile, the settlement program in the more-stable yuan would help mainland companies avoid exchange rate risks, and boost trade with Hong Kong and ASEAN, Ning Su, vice-governor of the People's Bank of China (PBOC), or the central bank, said on July 6.
In the long run, experts said the move marked an important strategic step to promote broader use of yuan internationally and gradually reduce reliance on the dollar.
Chinese currency should become a major means of trade settlement before it rises to a major currency in the world, and the nation is now working in that direction via the pilot project, Zhijie Ding , vice dean of finance at the University of International Business and Economics, told China Business Weekly.
It is also necessary for China to rectify the lopsided nature of the nation's status as an export powerhouse with an obscure currency, Ding added.
Given China's determination to reduce its reliance on the dollar, Ding said the Chinese yuan could go global in the next two to three years.
China, together with Brazil, Russia and India as emerging powers of BRIC nations have voiced concerns about the dollar's supremacy in the global financial system in recent months and called for the diversification of international currency reserves.
The dollar is declining so much that there is going to be a monetary panic of unprecedented size, said James DiGeorgia, expert of the Gold and Energy Advisor.
With a federal deficit of almost $74 trillion, the treasury keeps printing more and more money driving down the dollar's value.
With the US Federal Reserve printing money to help finance its economic stimulus, China was worried that the move might stoke inflation worldwide and reduce the value of dollars held by China.
China is quietly preparing for an economic war with the United States, DiGeorgia told IBTimes reporter in the interview.
Xiaochuan Zhou, governor of China's central bank, also caused a stir in April by suggesting in March that the International Monetary Fund's (IMF) Special Drawing Right (SDR) could eventually displace the dollar as the principal reserve currency.
The SDR is an international reserve asset allocated to IMF members. Its exchange rate is determined by a basket of currencies, including the dollar, euro, sterling and yen.
China earlier had signed currency swap deals with six countries, in part to boost the amount of yuan being held overseas and pave the way for settling international trade in yuan.
It is the right time to promote the use of yuan in international settlement. The value of Chinese currency has been stable, and the Chinese economy has outperformed the rest of the world in the wake of the financial crisis, China Daily reported on Monday, citing Ping Lian, chief economist with the Bank of Communications.
The move could be a boon to major Chinese firms in the selected cities, allowing them to avoid foreign exchange risks, Lian said.
However, whether the pilot program succeeds will depend on the agreement of China's foreign trade counterparts to use yuan in trade settlements, he said.
Experts agreed that the scale of yuan cross-border trade settlements would be limited at the initial stage, because only foreign companies in an inferior trading position with their Chinese counterparts are willing to be paid in yuan.
The country's import bills are more likely to be settled in yuan than exports, since importers usually have a bigger say in negotiating with their trade partners, Lian said.
Yuwa Hedrick-Wong, an economic advisor to MasterCard Worldwide in the company's Asia Pacific divisions, said another barrier is the limited amount of yuan in the overseas market.
Moreover, there are no channels for foreign yuan holders to hedge currency risks, since they are not allowed to invest in domestic capital markets and the yuan is not fully convertible, Hedrick-Wong added.
At this stage in the pilot project, the goal is to promote wider use of yuan in trade rather than investments, which are subject to fewer regulations.
Regulators can control the volume of trade settlements, and the qualifications of the firms that are allowed to participate in the trial program are under strict regulations, Lian said.
Thus, the risks of cross-border trade transactions using yuan are very limited, he said.