China Taking Small Steps Toward Yuan as a Regional Currency

The International Herald Tribune indicates that China is taking small steps to establishing the Yuan as a regional currency.

The yuan’s journey from a controlled, partially convertible currency to a liquid, regional medium of exchange will be a long one, because of the desire of the Beijing government for economic stability.

In addition, Beijing has always been wary of moving too quickly to open up its markets, fearing that such a move might leave its economy vulnerable to sudden shifts in capital.

In December, China said the yuan could be used for the settlement of trade between the industrial areas of the Pearl River Delta and Yangtze River Delta and the Chinese territories of Hong Kong and Macao.

And members of the Association of Southeast Asian Nations will be permitted to use yuan in their trade with the southeast China provinces of Guangxi and Yunnan.

Beijing has said these efforts are geared to promoting the country’s international trade and to helping Chinese companies limit their currency exposure, while giving foreign companies a chance to familiarize themselves with the yuan.

“Making yuan a regional currency will serve China well,” said Zhang Bin, an analyst at the Chinese Academy of Social Sciences, a government research institute.

“It can reduce the troubles of managing huge foreign exchange reserves,” Zhang said.

“And looking forward, it will eventually give China more power in the financial market to match its economic size and foreign exchange reserve levels,” he said.

The more the yuan moves offshore, the more that companies using it will want access to hedging markets to manage their currency exposure and trading risks. Until there are active hedging markets, like those for swaps and futures, companies offshore might remain lukewarm about adopting the yuan.