China prepares for the rise of the yuan

Quixotic or not, the Chinese are preparing for that day. In a series of what might be called baby steps, Chinese officials recently have moved to globalize the yuan and promote its influence overseas, with Shanghai designated as command central.

Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to make payments for Chinese exports in yuan, bypassing the dollar — the currency that dominates international trade and finance, including foreign exchange reserves. Beijing is also taking initiatives to use the yuan, also known as the renminbi, to settle trade accounts between some Chinese provinces and neighboring states, starting with Hong Kong.

“The central bank has set promoting the renminbi for payment settlements as the main task for this year's work,” said Shi Lei, an analyst in the global financial markets section at Bank of China in Beijing.

China is also spreading the yuan's influence in the Asian region by making loans and investments in other countries, as well as through its many tourists who are carrying loads of Chinese currency in their pockets. In Cambodia, where the U.S. dollar has long dominated, a tour guide in Angkor Wat recently asked visitors whether he could be paid in Chinese yuan. Meanwhile, Chinese officials have called attention to the risks of an international monetary system that relies on the dollar, which many analysts see as unstable because of heavy deficit spending by Washington to combat the recession.

Still, Kirby Daley, a strategist in Hong Kong for brokerage Newedge Group, said: “I think these are very, very shrewd moves” by the Chinese. “The timing is really good.”

Daley and other experts say it will take years for the yuan to supplant the dollar; the Chinese currency is currently tightly controlled and not even freely tradable in international markets. It will take time for the yuan to gain international acceptance and for China to reform its capital markets and diversify its economy, critical preconditions before the Chinese can elevate its currency to rival the dollar.

But given the high risk of inflation diminishing the value of the dollar, and neither the euro nor the Japanese yen viewed as attractive alternatives, Chinese and Western analysts say they can envision the yuan becoming the dominant currency by 2020.

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