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Yuan's influence set to grow globally
In 2009 when China allowed the yuan to be used in limited cross-border trading, it would have been hard to imagine the Chinese currency overtaking the pound as one of the world's top three traded currencies.
But this month, a survey released by HSBC, the largest bank in Europe, showed that more respondents chose the yuan as their primary currency over sterling, ranking China's currency behind the US dollar and euro as the three most-used currencies in international commerce.
HSBC conducted the survey in the first quarter, which collated the views of 6,390 exporters, importers and traders in 21 economies over six months.
"Emerging markets are paving the way for the yuan to be accepted as an international trade currency," said Rakesh Bhatia, HSBC global head for trade and supply chain. "By 2015, it is expected that approximately US$2 trillion, more than half of China's trade, will be settled in yuan."
Last June, the Chinese government expanded its pilot program under which the yuan is used to settle trade to 20 provinces and municipalities. Regulators have said the program will be further widened nationwide because it has proven successful.
Indeed, using the yuan in trade settlements in the first quarter of this year surpassed the total volume last year in Shanghai. Hang Seng Bank China said its yuan settlement volume has grown 10-fold since last June.
It came as a sea change. I still remembered an exports company executive's complaint about the cold shoulder from buyers on using the yuan for settlement during the early days of the program.
The yuan settlement now accounts for 6.8 percent of China's trade, up from zero when the pilot project was first introduced in Shanghai and four cities in Guangdong Province in 2009.
In the first quarter, yuan settlement totaled 360 billion yuan (US$55 billion), up 15 percent from the final quarter of 2010 and almost 20 times higher than in the same period in 2010.
The cross-border yuan trade could reach 8 percent of total trade this year, Zhang Guangping, deputy director general of the China Banking Regulatory Commission's Shanghai branch, said on May 11.
The easing of restrictions underscores China's ambition to support its currency in line with its expanding global economic influence.
"The central bank is now turning its focus to encouraging exporters to invoice and settle in yuan," said Stephen Green, Standard Chartered Bank's research head in China. "This would eliminate exporters' foreign-exchange risks and their need to sell US dollars to the central bank."
The popularity of yuan settlement among exporters can also ease pressures on China's over 3 trillion foreign-exchange reserves, at the end of March - the largest in the world.
With the easing of yuan restrictions, Hong Kong has benefited most, with yuan-denominated assets topping 70 billion yuan at the end of 2010.
Ma Jun, Deutsche Bank's chief economist in China, said he expects the scale to surge 10 times by the end of 2012 on rapid growth of yuan-backed bonds, loans and shares in Hong Kong.
Singapore is poised to join Hong Kong as an offshore trading center for yuan, the Straits Times reported in April.
Singapore will not try to rival Hong Kong as a yuan trading hub, focusing instead on facilitating trade settlements in the Chinese currency for Asian businesses, said Senior Minister Goh Chok Tong, who is also chairman of Singapore's central bank and a former prime minister.
Even London is trying to take a bite of the pie.
The Lord Mayor of the City of London, Michael Bear, said during a visit to Shanghai in April that London is angling to become an offshore yuan market.
The yuan is growing enormously as trade grows, Bear said, joking that Hong Kong shouldn't be too greedy to want it all.
"I think the market is big enough not just for Hong Kong," said Bear. "A multi-location market could be made, though London may not be in the early stage of the development."
The yuan's rise as a key trading currency, or even reserve currency, is likely in "the not-so-distant future," Bear added. "When that day comes, London wants to be part of it."
The growing yuan business has translated into more trade, more revenue and more jobs. No wonder, even a well-established financial center like London is eager to embrace the yuan.
The rise of the yuan also indicates the shift of power from West to East, which has been frequently discussed in the post-global financial crisis era.
Meanwhile, the yuan's slow but progressive appreciation is attracting investors.
The currency has gained more than 25 percent since July 21, 2005, when China dropped the yuan's decade-long peg to the US dollar and restructured it as a managed-float tied to a basket of currencies.
The yuan maintained a gradual appreciation until July 2008, when the global financial crisis broke out and caution prevailed.
The currency then resumed its appreciation last June, as exports began recovering. As of yesterday, it was trading at 6.5048 to the dollar, 9.2911 to the euro and 10.5170 to the pound.
A stronger yuan is emerging amid the recent weakening of the US dollar against major currencies.
Australia & New Zealand Bank said in a report that the US dollar's influence on the yuan, although still significant, has declined over the years.
In the pre-crisis period, a 1 percent gain in the US dollar resulted in a 0.93 percent rise in the yuan. However, that ratio declined to 0.74 percent in the post-crisis period, suggesting the weight on the dollar in the currency basket is declining as the yuan continued to appreciate.
Meanwhile, the yuan's influence on regional currencies has also been firming. As a result, most Asian currencies tend to move more closely with the yuan than with the greenback.
"Although the US dollar is still an anchor for emerging Asian currencies, its influence following the global financial crisis has been diminishing," said Liu Ligang, an Australia & New Zealand Bank economist.
"As use of the yuan as a trade-invoicing currency gradually grows in the region, its movements will certainly have a stronger impact on the regional currencies," he said.
"Looking forward, we are confident the yuan will eventually become an anchor currency in emerging Asia," Liu said. "If the yuan were to appreciate faster, we expect a board-based appreciation of Asian currencies to follow."
Deutsche Bank's Ma is also bullish on the yuan's appreciation. He said he expect the yuan to be fully convertible in five years.
Ma also predicted that the yuan will become a reserve currency and account for 5 percent of global reserves in 10 years.
The yuan's weight in global reserve currencies may even reach 20 percent in 20 or 30 years, Ma said.
He cited China's strong economy and trade as the backbone for the yuan's strength and even predicted China will overtake the United States the world's biggest economy in 2022 and surpass the US in trade in 2016.
Other analysts are more cautious on these bullish calls, noting restrictions on China's capital account and limited investment options in the yuan.
Offshore, the yuan needs channels to flow back to the Chinese mainland and create a circulation cycle for the yuan to really go global, said Jing Ulrich, JPMorgan Chase's managing director for China.
"Substantial hurdles remain in the internationalization of the yuan," she has said.
For many investors, the 5 percent to 6 percent appreciation of the yuan is not attractive enough yet for them to hold the currency. At this stage, China's capital account and investment flows are still tightly under the control of a government determined to proceed slowly and deliberately in opening up its markets. That means yuan generated or pooled overseas can't easily flow back to the mainland for investment, limiting investors' interest in holding the currency.
It may take years for the yuan to become fully convertible. But few experts would argue that the yuan has made headway much faster than expected.