Banks in China and Hong Kong began wiring yuan directly to each other on Monday to settle payments for imports and exports, as China took another step toward establishing the yuan as a global currency — and, eventually, an international alternative to the dollar.
China has tempered its recent calls for a global reserve currency other than the dollar going into a meeting of the world’s major industrialized countries and biggest emerging economies in Italy today. Chinese Vice Foreign Minister He Yafei (何亞非) said on Sunday that the dollar would remain the world’s dominant currency for “many years to come.”
But the Chinese government is accelerating the process of making its own currency, the yuan, more readily convertible into other currencies, which gives it the potential over the long-term to be used widely for trade and as a reserve currency.
The day that the yuan is fully convertible — more than a few years away, but perhaps less than a few decades — will most likely mark a huge shift in global economic power and a day of reckoning of sorts not just for China but also for the US, which will no longer be able to run up huge debt without economic consequences.
Despite the slow, cautious pace at which China is moving, few experts on Chinese monetary policy doubt that the long-term direction of policy is toward strengthening the yuan as an alternative to industrialized countries’ currencies.
“To many minds here in China the US dollar’s time is almost up,” wrote Stephen Green, an economist in the Shanghai offices of Standard Chartered, in a research note last Thursday. “The euro zone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favors.”
For decades, China has shielded the yuan behind high barriers. Authorities in Beijing prevented sizable amounts of the currency from building up beyond China’s borders to allow them to control the exchange rate and tightly regulate the financial system.
By keeping the exchange rate low, China keeps its exports competitive.
But, as a result, almost all payments for China’s imports and exports, as well as international investment in China and Chinese investment abroad, are made in dollars. Smaller sums cross China’s borders as euros and yen, but seldom yuan.
China is now starting to tear down these walls and free the yuan — a decision driven partly by recognition of China’s rising role in the world economy and partly by disenchantment with the currencies and financial systems of the industrialized world during the current downturn.
“China definitely wants to reduce its dependence on the US dollar,” said Xu Xiaonian (�?~), an economist at the China Europe International Business School. “Given the quantitative easing of the Fed and the risk of worldwide inflation, it is understandable why China would want to accelerate the convertibility of the renminbi.”
China’s leaders tend to plan far ahead, however, and full convertibility for the yuan is likely to take years, said three people who have discussed the issue with China’s central bank policymakers. All three said that China’s recently announced goal to turn Shanghai into an international financial center by 2020 meant that China probably wants a yuan that is fully convertible into other currencies by then.