A few days before March’s G20 summit in London – through the governor of its central bank, Zhou Xiaochuan – China called for the creation of a new currency to eventually replace the US dollar as the world’s standard.
Three months later, the People’s Bank of China went ahead with a “Pilot Programme of Renminbi [yuan] Settlement of Cross-border Trade Transactions”, allowing companies in Shanghai and four cities in Guangdong province to settle trade in yuan with businesses in Hong Kong, Macau and the Association of Southeast Asian Nations.
This last move sparked talks about the real intentions behind the pilot programme, as many saw it as the first step in a move to turn the yuan into the new world currency for settling international trade.
But this is easier said than done.
For such a massive sea-change in the international financial system, the yuan, or renminbi as it is also known, must first be totally convertible, and China would also need to liberalise its markets and undergo major structural social and economic changes – surely a long and painstaking process.
Liu Tienan, vice chairman of China’s National Development and Reform Commission, admitted in April that it is hard to set a timeframe for the currency’s move towards convertibility, and this is the major obstacle to China’s intentions. But there are others.

Change of regime
Recently, an economist with HSBC bank said that the yuan could overtake the Japanese yen and become the third most important international currency used in trade by as early as 2012, and that as much as 50 percent of the country’s trade could be settled in yuan by the same year.
To economist and university lecturer, José Duarte, these expectations are overblown: “A global trade currency implies the world’s trust in the economic policies and in the government of the country that issues it. But the Chinese economy is not sufficiently open, nor is its regime transparent enough to generate such trust,” he tells Macau Business, adding that: “For that reason, I don’t see how the yuan could become a global currency. It can, of course, play a major role in bilateral relations between China and other countries, but that doesn’t turn it into a major currency, that is just a way to settle bilateral trade.”
The way Duarte sees it, China’s intentions are altogether different: “What Beijing really wants is to raise expectations around the dollar because it fears its devaluation.”
Beijing is the top holder of US debt with its holdings of American Treasury securities topping US$800 billion. This is a double-edged sword – if China attempts to diversify its holdings, it could cause a collapse in the value of the dollar and this would, in turn, lower the value of China’s own reserves. So the only way is to slowly move out from the dollar into other currencies.
Duarte also believes that China’s central bank has no illusions about the yuan’s possibilities on the global stage because, as he says: “To turn it into an international currency would mean changing the Chinese regime itself. As simple as that.”

Yes, they can
For an expert in the financial markets, who preferred not to be identified, the yuan may well become an international trade currency.