China: The Internationalization of Yuan Will Take 15 to 20 Years

The yuan will become an international currency, but only after a process that will last 15 to 20 years, said Dai Xianglong, former governor of the Bank of China, quoted Monday by the semi-official agency New China.

The first step is to make the yuan a trade settlement currency, the second to allow investors to enter and withdraw funds from China, and the third to make it an international reserve currency, said Dai, who now heads the National Fund of social Insurance in China.

To overcome these “three steps” will require between 15 and 20 years, says Dai.

The yuan, which is currently not convertible for capital accounts, is still tightly pegged to the dollar, with a daily fluctuation of only plus or minus 0.5% versus the greenback and a central rate set daily by the central bank.

Beijing is already encouraging the use of its currency for trade with neighboring countries of China and began to allow some foreign investors to use yuan earned abroad to invest in China.

But the Chinese government is wary of speculative flows and still maintains tight control over capital movements.

“We hope that by 2015, the renminbi (yuan’s official name) could become an important currency for Special Drawing Rights (SDRs),” International Monetary Fund (IMF), said Mr Dai.

Unit of account of the International Monetary Fund (IMF), the SDR is an international reserve asset, created in 1969 to complete the official foreign exchange reserves of the States.

Its value is being determined by a basket of four currencies: dollar, euro, sterling and yen.

The current governor of the Chinese central bank, Zhou Xiaochuan, was proposed in 2009 that the SDRs replace the dollar as international reserve currency.

China seeks to reduce its weakness of dependence on dollar which threatens the value of its huge foreign exchange reserves, amounting to more than 3,000 billion.

According to Dai, who represents one third of total foreign exchange reserves of the planet. He added that as the Chinese economy, the second in the world, weighs 10% of global GDP, “the internationalization of the currency seems obvious: it will not only be beneficial for China but also to improve the international monetary system.”