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Yuan internationalization mainly driven by market demand

(People's Daily Online)

08:06, June 14, 2012

The internationalization of the yuan, which has not achieved full capital account convertibility, is mainly driven by market demand, experts said at the sixth China International Private Equity that kicked off in Tianjin on June 10.

Demand for yuan trade settlement promotes the currency’s internationalization.

Wang Xiaoyi, deputy head of the State Administration of Foreign Exchange, said that it will be a major step from yuan convertibility to yuan internationalization during the process of China’s integration into the international community.

“Although China is now the world’s second largest economy, it cannot be considered a world economic power until the yuan becomes a reserve currency,” Wang said.

The yuan has been converted into a growing number of foreign currencies along with the rapid development of China’s real economy and foreign trade particularly since its accession to the World Trade Organization, so the Chinese currency’s first step toward internationalization was to function as a settlement currency. The growing use of the yuan in international trade and investment fully proves that the yuan is worth investing in and holding for the long term.

Li Daokui, director of Tsinghua University’s Center for China in the World Economy, noted that the internationalization of the yuan is part of China's economic development.

“Trade between China and the Association of Southeast Asian Nations (ASEAN) has grown rapidly in recent years, but has been mainly settled in the U.S. dollar. After the 2008 global financial crisis, the dollar suffered liquidity problems and became unstable, causing considerable damage to China-ASEAN Trade. The yuan internationalization can promote the development of the real economy, and create a relatively stable environment for cross-border trade in the region. This is why the yuan must be used internationally before the conditions are ripe for its internationalization,” Li said.

“Along with the development of international trade, certain overseas investors hold long yuan positions, and need reliable yuan investment channels,” said Cao Yuanzheng, chief economist at the Bank of China.

According to practical experience, the first step in internationalizing a currency is to promote its use in cross-border trade settlement. At present, Hong Kong is the only offshore yuan business center with the most abundant yuan -denominated financial products.

However, Cao noted that the yuan has to be used by a third party to achieve true internationalization. “The yuan will become a truly international currency if it is used as a reserve currency by other countries.”

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