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Commodities trading a major hurdle for global yuan use

By Zhang Monan (Global Times)

08:07, May 02, 2012

Recently, there have been several reports in the media about moves aimed at promoting the use of the yuan as an international currency. In the middle of last month, for example, HSBC announced that it was planning to issue yuan-denominated bonds in London. Also, last week, it was reported that the People's Bank of China had signed an agreement with the World Bank Group (WBG) to invest in China's inter-bank bond market on behalf of two WBG agencies.

These moves though, which focus on the development of the yuan-denominated bond market, will do little to push the yuan onto the global stage. The main problem facing the yuan is that it still fails to function as a measure of the value of commodities.

Generally, a currency achieves global prominence once it is used in the valuation and settlement of commodities, especially important energy resources. Both the pound and the US dollar, the world's former and current key currencies, experienced such a progression. In the 19th century, the world's main energy source, coal, was priced in the pound; while in the 20th century, the US dollar prevailed in the settlement of crude oil.

The US dollar also dominates the pricing of many of the world's most widely-traded commodities, including metals and agriculture products. As long as the US dollar continues to hold sway over the settlement of vital commodities, it has the power to influence China's economy, especially as the country becomes more dependent on imported energy resources.

In the past decade, China's demand for commodities has grown enormously. According to a recent research report from Greatwall Strategy Consultants, China is the world's largest consumer of 19 of the 25 commodities in tracks. It is estimated that by 2030, China will have to rely on imports to meet 70 percent of its petroleum needs and 50 percent of its natural gas needs, according to the Report on China's Energy Development for 2011, compiled and edited by Liu Tienan, director of National Energy Administration.

As demand grows, a depreciating dollar will push up the price of imported commodities for China. Actually, there is evidence that this process has already begun with some commodities. In 2011, for example, China paid 45.3 percent more compared with the year before to import only 6 percent more petroleum.

To make its currency more independent and more internationally relevant, China has to step up the use of the yuan in the global commodities market.

I suggest the government push for yuan settlement and pricing in commodities trading with Africa, the Middle East and the Association of Southeast Asian Nations in order to gradually promote the internationalization of its currency.


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