BEIJING--Financial markets across the world are competing to become centers for yuan trading as China attempts the perilous task of gradually globalizing its currency while avoiding speculation that might unbalance its economy.
The emergence of the yuan as a trading currency over the past four years has been dramatic, with the sums used to settle cross-border trades surging from about 3.6 billion yuan ($570 million at the current exchange rate) in 2009 to about 2 trillion yuan in 2011. Transactions using yuan reached 10 percent of China’s total trade in 2011.
Seeing financial markets in turmoil following the collapse of the U.S. investment bank Lehman Brothers in 2008, China’s leadership decided that depending too much on the dollar was risky and began encouraging domestic and foreign businesses to settle their exports and imports with yuan.
China does appear to be working toward establishing the yuan as a key global currency, but the strategy is gradualist and, despite the energetic efforts of financial institutions in Japan, Britain and other countries to control the action, the Chinese appear determined to avoid reliance on any one center.
As a result, only a limited amount of yuan is in circulation overseas. Beijing has created markets for yuan-denominated stock and bonds in Hong Kong, which has free financial markets but is relatively easy for China to monitor and control, and appears to be moving adeptly to foster competition between foreign markets.
In early December 2011, a senior official of Japan’s government was caught by surprise while negotiating a document on monetary cooperation at the People’s Bank of China when the Chinese side proposed removing references to “Tokyo” from an English-language draft drawn up by the Japanese side, effectively obscuring which country China was cooperating with.
From the Japanese perspective, making Tokyo an important market for yuan is a key objective.
Also in December, Prime Minister Yoshihiko Noda visited China and agreed with Premier Wen Jiabao to cooperate on the development of financial markets in both countries. The two nations are committed to increasing deals using yen and yuan, and Japan will invest in Chinese government bonds.
Takehiko Nakao, Japan’s vice minister of finance for international affairs, said in a speech at Peking University on March 13, “(Japan) aims at making Tokyo an important market of yuan.”
Nakao said he was in favor of Japanese financial institutions and other businesses using yuan in investment and trade settlements. “An expanded use of yuan does not contradict a wider use of yen,” he said.
China welcomes the Japanese move, which does promise to enhance the yuan’s international credibility, although there had been concerns in China about giving too much leverage to a regional rival. One People’s Bank official said previously: “Japan could suppress yuan’s development.”
A former Japanese vice minister of finance for international affairs, however, said such an approach would be self-defeating.
“The yuan’s internationalization cannot be stopped even if Japan tries to do so,” the former vice minister said. “It’s better to see it as a business opportunity.”
Japan is not the only financial powerhouse with its eye on the yuan trade. At the China-UK Economic and Financial Dialogue in London last September, Chinese Vice Premier Wang Qishan and British Chancellor of the Exchequer George Osborne referred to the possibility of trading yuan on the London markets. The British government launched a team in January to work with Hong Kong, which is already handling yuan-denominated products.
Singapore officials have been lobbying Beijing to try to get yuan business, and U.S banks are also eager to get a piece of the action.
Beijing has kept restrictions on the yuan’s circulation outside of the country, sometimes making it hard for foreign firms to obtain the currency, but it has been striking bilateral currency-swap pacts. The swaps allow businesses in a foreign country to obtain yuan from their nation’s central bank, making it easier for foreign firms to use yuan in settlements with Chinese companies but keeping a lid on speculation.
In March, China and Australia signed an accord to swap yuan with the Australian dollar with a cap of 200 billion yuan. Beijing has concluded similar deals with 17 nations and regions, including South Korea, since 2008, with a total scale of 1.6512 trillion yuan.
Japan also signed a $3-billion swap deal with China in 2002, and the government and the Bank of Japan are currently consulting with businesses about extending the arrangement
More fundamentally, a BOJ negotiator at the time of the 2002 talks said, that deal was part of the process of the Chinese currency’s slow but inevitable rise.
“It was a symbolic pact because it meant Japan acknowledged yuan as an international currency,” the official said.
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