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China is promoting greater use of the yuan in global trade, investment and as a reserve currency
China’s currency, the yuan, ascended to a higher global status in 2014, with the value of cross-border payments by the currency accounting for 23.6 percent of total cross-border payments, according to a report on the globalization of the yuan released by the People’s Bank of China, the country’s central bank, on June 11.
Data from the Society for Worldwide Interbank Financial Telecommunication shows that the yuan became the second most used currency in trade finance—letters of credit and collections, the fifth most popular payment currency and the sixth most used foreign exchange currency in the world in December 2014.
In an effort to make the yuan an international currency in a real sense, China is pressing ahead with financial reforms so that the yuan can become part of the basket of currencies determining the value of Special Drawing Right (SDR), an international reserve asset created by the International Monetary Fund (IMF) in 1969.
Allocated to IMF members on the basis of their contribution to the fund, SDR represents a claim to foreign currencies for which it may be exchanged in times of need. Currently, the SDR basket consists of four currencies—the U.S. dollar, euro, British pound and Japanese yen. The composition of the SDR basket is due for a once-in-five-year review this year. China has been seeking inclusion of the yuan so that the currency will be recognized as an international one.
In a display of support, IMF president Christine Lagarde said in March that the yuan’s inclusion in the SDR basket is “not a matter of if, but when.”
If the yuan is included in the SDR basket, its status as a global reserve currency will be significantly enhanced. In addition, inclusion into the SDR basket will to a great extent catalyze reforms in China’s financial markets, especially in foreign exchange administration and yuan convertibility under the capital account.
According to the central bank report, the Chinese currency is enjoying a greater popularity in cross-border trade and direct investment. In 2014, yuan payment under the current account totaled 6.55 trillion yuan ($1.06 trillion), surging 41.6 percent year on year. Outbound direct investment from the Chinese mainland priced in the Chinese currency totaled 186.56 billion yuan ($30 billion), a 117.9-percent increase, while foreign direct investment onto the Chinese mainland settled in the Chinese currency amounted to 862.02 billion yuan ($138.87 billion), a year-on-year jump of 92.4 percent.
Over the past year, China has also promoted the expansion of currency swap agreements and direct trading between its yuan and other currencies as well as the establishment of offshore yuan hubs.
China is not far away from full convertibility of the yuan under the capital account, the central bank said.
Lu Zhengwei, chief economist with Industrial Bank Co. Ltd., attributed the rising popularity of the yuan to three factors.
China is speedily accumulating weight and influence in the global economy; its foreign trade, outbound direct investment and inward foreign direct investment are increasing fast; and finally, the central bank is making continuous efforts in promoting the cross-border use of the yuan, as evidenced by it signing currency swap agreements with an increasing number of economies and establishing more overseas yuan clearing banks, Lu summarized.
That said, Tan argued the yuan is far from challenging the dominant status of the U.S. dollar.
“It’s already a great success if the yuan can survive, develop and get stronger under the dominance of the dollar,” said Tan. “It’s way too early to discuss when the yuan can have an equal status with the dollar or even supplant it.”
Full article: Global Currency in Sight (Beijing Review)