China Yuan Inches Closer To Global Currency
China’s yuan is just two years away from becoming a global trade currency.
A system to settle cross-border yuan transactions and boost the convertibility of the currency is being set up in Beijing and will be rolled out by 2014, Central Bank officials noted yesterday. Once set up, it would allow countries to settle payments in Chinese goods in yuans instead of dollars. Over the long term, the use of the yuan, particularly in Asian trade, would take some demand away from the dollar which currently enjoys the status of both the world’s reserve and trade currency.
Currently cross-border yuan clearance is conducted through the Hong Kong and Macao branches of the Bank of China, or agency banks of overseas participants. Actual demand for cross-border yuan settlement is increasing in Asia, but transaction costs in the current payment system are higher than the dollar.
“The new system will link domestic and overseas participants directly, and support different languages including Chinese and English. What’s more, the working hours will be extended to 17 or 18 from the current eight to nine hours to cover yuan settlement demand from different time zones,” said Li Yue, director of the payment and settlement department at the People’s Bank of China in a China Daily report on Thursday.
Li said that the system will adopt global standards, and probably use the international messaging service, the Society for Worldwide Interbank Financial Telecommunication, commonly known as SWIFT.
International trade settled in yuan currently exceeds 2 trillion yuan ($317 billion) and foreign direct investment settled in yuan reached 110 billion yuan last year, according to the Central Bank.
For the World Bank, China’s growing role in global trade, the size of its economy and its role as the one of the world’s largest lenders, mean that the yuan’s internationalization is “inevitable”. Acceptance of the Chinese currency as a major global reserve currency, however, will depend on the pace and success of financial sector reforms and the opening of China’s external capital accounts, the World Bank said.