Extending the yuan’s reach

Extending the yuan’s reach

CHINA - Internationalisation of the yuan is taking major strides towards becoming a reality. As China's biggest partner in the region, Malaysia needs to prepare itself for this eventuality, and increase the percentage of its trade with China that is settled in yuan.

According to a report released by the Bank for International Settlements in September, the yuan jumped from the 17th spot in 2010 to the ninth most actively traded currency in the world. The key lies in expansion of offshore trade.

In a report by HSBC, yuan usage is predicted to account for an estimated US$2 trillion (S$2.51 trillion) in 2015, which will catapult the currency to becoming the third largest trading currency after the dollar and the euro.

Compared with the dollar, euro and yen - currently the world's top three most traded currencies - the market share of the yuan remains small.

However, the rapid growth of yuan offshore trading proves the currency is on track for internationalisation.

The issue of yuan internationalisation has become imperative as global factors are taken into account. Examples include the debt crisis in the United States and European Union; global monetary easing policies; the weakening of traditional international currencies; and an insufficient supply of gold and other precious metals.

But, is the yuan prepared to internationalise?

From the perspective of Anbound Consulting - an independent Chinese think tank focusing on public policy matters - even with favourable statistics and an encouraging global economic background, the Chinese government and central bank still need to do more comprehensive and systematic planning.

This planning includes: Expanding the offshore yuan settlement market; unleashing yuan cross-border settlement to all industries; enlarging currency swaps and links with trading settlements; encouraging yuan-denominated trading financing; and improving the Chinese financial market system.

No time frame was provided for the yuan's internationalisation at this month's third plenum by the Chinese Communist Party, but there is no doubt China wants it to become a major global currency. This intention was clearly shown in the report of the third plenum.

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