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UPDATED: May 13, 2013 NO. 20 MAY 16, 2013
Internationalization in Process (CHINESE VERSION)
Sound and sustainable growth of the Chinese economy will determine whether yuan goes global
By Lan Xinzhen
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OFFSHORE CENTER: Hong Kong residents pass by a branch of Bank of China. Hong Kong is the world's most mature offshore yuan market (CHEN XIAOWEI)

June 1 is the first anniversary of direct trading between Chinese yuan, or renminbi, and Japanese yen. The anniversary comes at a time of strained ties between China and Japan, the world's second and third largest economies, and inactive trading between the two currencies. But the yuan's internationalization process has never once slowed, and the use of yuan in the international market continues to grow.

According to figures from the People's Bank of China, the country's central bank, China has reached currency swap agreements with more than 20 countries and regions, including South Korea, Malaysia, Singapore, New Zealand, Argentina and Turkey, with an aggregate swap value of 2 trillion yuan ($322 billion). In 2012, 12 percent of China's foreign trade volume was settled in yuan, while in 2010 the proportion was only 3 percent. The offshore yuan capital pool, which did not exist three years ago, stood at 900 billion yuan ($145 billion) at the end of 2012.

Remarkable progress, too, has been achieved in yuan's exchange rate scheme. Since 2005, yuan has appreciated by 36 percent against the greenback. Slow appreciation and a comparatively stable exchange rate are conducive to advancing yuan's internationalization process.

"Yuan's internationalization is moving forward in a steady and orderly way," said Yi Xianrong, a researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences (CASS).

According to Yi, internationalization will not, as some worry, challenge the status of U.S. dollar. Instead, the aim is for growing acceptance of China's currency by the international community and for international settlement, investment and foreign exchange reserves.

Growing demand

Yuan began to be recognized internationally following the onslaught of the Asian Financial Crisis of 1997. With a stable exchange rate and the Chinese Government's sense of responsibility during the crisis, the yuan was widely used among Southeast Asian countries.

After the 2008 global financial crisis, Southeast Asian countries, in order to avoid the negative impact of a fluctuating U.S. dollar, choose to settle bilateral trade with China in yuan, making the yuan the second most important currency in the region after the U.S. dollar.

To satisfy such demand, the central bank signed a $2-billion currency swap agreement with the Bank of Thailand in 2001. Since then, China signed such agreements with other countries in the region.

With the rapid development of the Chinese economy, other neighboring countries began to use yuan. By the end of 2008, China had signed bilateral currency settlement agreements with nine neighboring countries, including Russia and Mongolia. The yuan has become a bona fide regional currency. In 2009, the Chinese Government allowed domestic companies to settle foreign trade in yuan because of a depreciating U.S. dollar.

On April 10 of this year, the yuan began direct trading with the Australian dollar, widely seen as a coup for the Chinese currency's march toward more global acceptance. To promote direct currency trading, China's central bank approved 34 foreign exchange market makers, such as Bank of China, Industrial and Commercial Bank of China as well as foreign banks including Citibank, Standard Chartered Bank, Deutsche Bank AG, BNP Paribas and Sumitomo Mitsui Banking Corp.

"There are no legal obstacles holding back the use of yuan in international trade settlement," said Huang Ying, an analyst with Guodu Securities Co. Ltd., which estimates that 136 countries are currently using yuan in settling international trade.

Demand for the yuan in Britain, France and Canada has increased remarkably in recent years. Their central banks are all preparing to sign currency swap agreements with China's central bank. According to a report released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) on April 25, French companies had issued 7 billion yuan ($1.13 billion) of yuan bonds in 2011-12, and Paris had attracted 10 billion yuan ($1.61 billion) of yuan deposits, the second largest in Europe after London.

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