CHINA: TRYING TO BOOST ITS CURRENCY

The increased use of the Chinese yuan in trade and investment settlement will pave the way for the currency to become fully convertible, although the process will be gradual, central bank governor Zhou Xiaochuan said , without offering any time frame.

Beijing has been trying to boost the global clout of its currency by promoting the use of the yuan in foreign trade, investment settlement and signing bilateral currency swaps with other countries.

The yuan is widely expected to eventually become a major world reserve currency, along with the dollar and euro. Analysts say for that to happen, however, China would need to make the yuan fully convertible, and the government has given no clear indication of when that might happen.

“When there is a certain amount of cross-border use of the yuan, there will be a natural demand that the yuan will move toward full convertibility in a gradual and orderly manner,” Zhou told the Lujiazui forum, an annual gathering of Chinese officials and executives in Shanghai.

“The cross-border use of the yuan, at the initial stage, means the use of yuan in trade and investment activities. Meanwhile, we also allow the yuan to be used in financial deals in a cautious and prudent manner,” Zhou said.

Replace the dollar

Zhou made headlines in March 2009 by proposing to replace the dollar
eventually as the world’s main reserve currency with a beefed-up version of the Special Drawing Rights (SDR), the International Monetary Fund’s accounting unit.

The idea is considered premature by some, but Zhou has spearheaded a programme to boost the use of the yuan in trade and investment to ensure the currency becomes a major component of the SDR. As part of its efforts for a gradual liberalisation of its markets, China is planning to launch its so-called international board in Shanghai, which will allow foreign firms to list on the mainland for the first time.

NYSE Euronext Chairman Jan-Michiel Hessels said the bourse was working with Chinese authorities to prepare for the launch of the board and was helping develop a derivatives market. Hessels said the NYSE was also strongly interested in listing on the international board, though it was up to Chinese authorities to decide.

“We are strongly interested. As an even stronger leading stock exchange we feel we should be listed on the international board,” he said. “It’s up to the authorities to see if we are still the favourite candidate.”

HSBC , Unilever and Standard Chartered Plc have said they want to list on the Shanghai Stock Exchange when rules allow. PBOC’s Zhou said the government was trying to find a policy balance between controlling inflation and supporting economic growth.

“We need to find a new balance point at which we can promote economic growth on the one hand and control inflation on the other hand,” Zhou said.