China moves to make yuan global currency

26 December 2008

Armed with a staggering $1,89 trillion in foreign exchange reserves, the Chinese government announced the first step towards making the yuan, its currency, an international currency, by allowing it to be used as a mode of payment in business deals with some neighboring countries. The move would also curb the effect of the volatility of the dollar on trade settlements.

With trade settlements being done mainly with the dollar and also the euro, the yuan, currently not a freely convertible currency, this pilot project will be first tested by allowing the yuan to be used to settle trade payments between the delta regions of China's Pearl and Yangtze rivers and the special administrative regions of Hong Kong and Macau.

The Guangxi Zhuang autonomous region and Yunnan province will be allowed to use the yuan to settle trade payments with ASEAN countries like Thailand, Laos, Burma, Malaysia, the Philippines, Singapore, Cambodia, Brunei, Vietnam and Indonesia.

However, the Chinese government did not specify how and when the pilot project would start.

The recession in the US, Japan and many EU nations, led to decline of China's exports declined by 2.2 per cent in November, the first decline in more than seven years. Chin now plans to boost its sagging export sector by allowing the yuan to settle trade payments with neighboring countries along with a series of other measures.

After a meeting of China's State Council yesterday, the cabinet released a document announcing a raft of more measures to encourage domestic spending by doling out more subsidies for buying household appliances and other merchandise to the rural people and increasing the number of stores and distribution centres in the hinterland.