Yuan takes next step

China's State Council and its central bank, the People's Bank of China are poised to approve the official use of the yuan for settling international trade deals, taking it one step away from becoming a fully convertible currency.

The Bank of China and the Bank of Communications are expected to be the first banks to use the yuan to conduct such business.

In May 2007, the finance ministers of the 10 ASEAN countries and those of Japan, China and South Korea agreed on a package of currency deals on the region's foreign reserve system. They also confirmed the yuan's status as one of the most important currencies in the region. At the end of last year, the State Council formally decided to carry out an experiment on trade between Guangdong and the Yangtze River Delta with Hong Kong and Macao and also between Guangxi and Yunnan with ASEAN members using the yuan. The central banks of China and South Korea also signed an accord on mutual currency exchanges.

In January, the central bank and the Hong Kong Monetary Authority signed an accord on mutual currency exchange of 200 billion yuan. This was official recognition of the already existing use of the yuan for settling a large volume trade between the Chinese mainland and Hong Kong.

Last year, the mainland's volume of trade with Hong Kong reached $203.7 billion. Trade with ASEAN members came to $231.1 billion. The combined figure accounts for 17 percent of the mainland's total import and export value. Since the 1997 Asian financial crisis when China promised not to devalue its currency, the yuan has become a hard currency.

Given that the yuan has long been used for trade, and is the country's legal currency, it should gain official approval and legal protection. Otherwise, China's national interests and economic development will suffer. So far, the market has responded positively to the upcoming official recognition of the yuan for international trade.

China Business News

(China Daily 03/16/2009 page2)