Beijing (AsiaNews/Agencies) – On the eve of the G8 Summit, which starts on 6 July in L’Aquila (Italy), the People’s Republic of China is flexing its muscle in order to oust the US dollar as the currency of reference to allow trade transactions in yuan.
Under new regulations issued by China’s central bank, the People’s Bank of China, a select number of companies will be able to settle trade transactions in yuan through financial institutions in Hong Kong and Macao, followed later by other southern Chinese cities. South East Asian nations should be able to do the same further on with southern Chinese provinces of Yunnan and Guangxi as well.
On the short run, nothing will really change but these new rules are a sign that Beijing wants to increase the international use of its currency at the expense of others.
Some analysts suggest that with the US dollar in crisis, the Eurozone in a political impasse, and the yen feeling the effects of Japan’s economic slowdown, some companies and business might be tempted by the yuan, betting that mainland China’s currency will get stronger, thanks to the support of the Chinese government.
Beijing’s new rules also come a day after China’s Deputy Foreign Minister He Yafei said that next week’s G8 summit in Italy should look at the issue of future currency diversification. The G8, which includes the United States, Russia, Japan, Germany, France, the United Kingdom, Canada and Italy, has also opened its doors to emerging nations like China, India, South Africa and Brazil.
China’s central bank governor Zhou Xiaochuan wants the world to adopt Special Drawing Rights (SDRs) as a global reserve currency. SDRs are units of account made up of the US dollar, the euro, the pound and the yen used by the International Monetary Fund.
Experts expect Chinese President Hu Jintao to make this proposal at the summit with the support of the other emerging nations, asking perhaps that the yuan be added to the SDRs’ basket of currencies.
Beijing does not want any hasty decision because of its potentially negative impact on world trade. It does however want a discussion on which currencies could be used as currencies of reference. This way it would force the dollar to maintain its current store of value, enable Beijing to retain its central role whilst increasing the importance of its own currency.
For years Beijing has maintained the yuan undervalued against the US dollar. This has enabled China to maintain a steady trade surplus and accumulate foreign-exchange reserves worth US$ 1.954 trillion by the end of March of this year. About US$ 1.5 trillion of China’s total foreign reserves are also in US dollars, about 763.5 billion in US Treasury bills.
But the current US financial crisis is a huge headache for Chinese leaders because it is causing the US dollar to depreciate.
Hence China would like to see the US currency lose value and importance, but slowly so that it can diversify its reserves whilst stimulating the rise of the yuan.
Former Chinese Deputy Premier Zeng Peiyan highlighted his government’s concern at the risks posed by a global financial system dominated by the dollar, urging more oversight of countries issuing reserve currencies.
But the United States is not just fence sitting. Instead the Americans are putting pressure on China to revaluate the yuan.
As for countries that want to reduce their exposure to the dollar, Owen Humpage, senior economic adviser to the Federal Reserve Bank of Cleveland, has one piece of advice: stop intervening in the foreign-exchange market and just allow their currencies to appreciate.