September 16, 2009

Yuan not ready for internationalization

China may be the world's fastest growing economy but its central bank official says it is not yet time to internationalize the country's currency.

We should be very cautious in discussing internationalization of the country's currency, Guo Qingping, assistant governor of the People's Bank of China, told a domestic briefing on the Group of 20 summit next week in Pittsburgh, China Daily reported.

He said China's economy is still small compared to the United States and its currency exchange is still highly regulated.

Market forces, not our own urging, will determine whether the currency will be internationalized, Guo said.

Earlier this month, Chinese Premier Wen Jiabao echoed similar views, saying while the status of the renminbi (yuan) had risen on the global market, it has not attained full convertibility.

Currently the currency is convertible only under the trade account, but not under the capital account. However, since April the Chinese Cabinet has allowed importers and exporters in five major Chinese cities to settle cross-border trade deals in yuan. The country also has signed $95.5 billion worth of currency swap agreements with some countries, moving a step closer to the yuan's internationalization.

There's been much talk in China to make the yuan an international currency in view of China's huge foreign exchange reserves exceeding $2 trillion and its growing status in world trade. There is also concern the declining U.S. dollar would bring down the value of its asset holdings such as the U.S. Treasury bonds.