The Yuan creeps towards world currency status

Prior posts have discussed how the Chinese currency is inexorably moving towards becoming a world currency.  Although convertibility is not imminent, a parade of steps continues in that direction.  In late April 2011, the Export-Import Bank of China (China Exim) announced another example of the yuan’s march towards acceptance as a world currency – not a reserve unit, but a monetary device useful outside of China.

China Exim announced a Latin America infrastructure fund (with capital of about US $1 billion), denominated in yuan.  The purpose is for investment in Latin America, with focus on infrastructure projects both public and private.  The fund is available to firms in the private sector to encourage their investment into activities outside of China.  See China Daily, April 29-May 1, p. 13 for further details.

This step is another move in the yuan’s use outside of China.  Many similar steps have occurred in recent months, including the ability of US and other persons to hold RMB accounts in the USA and Peru’s opening the first Latin American yuan-denominated trade settlement account.  These and other steps pave the way towards inclusion of the yuan in the basket of currencies that make up Special Drawing Right reserves of the International Monetary Fund.  These moves allow the yuan to be tested and utilized under real cross-border conditions.  Given the prevailing view that the yuan is undervalued, there is an important side benefit to Chinese companies.  A Chinese company can invest today in a yuan-denominated activity without fear that it will lose value in the short term compared to delaying activities until the yuan appreciates further.  China recognizes the need for money in its various forms to flow easily, while not yet ready to use convertibility as the solution to this imperative of business. 

Posted by: Joseph J. Dehner

Categories: China Desk