Yuan, the dollar of the future?

RGE Monitor

# China will allow companies to use yuan to settle their trade between selected provinces and Hong Kong and Macao on a trial basis, reducing currency risk for HK exporters (Caijing). Pilot projects will use the yuan as a settlement project in projects in Asia. Chinese exporters may also increase fx advances (China Daily)
# China's currency swaps concluded in late 2008 and early 2009 with six emerging economies including Indonesia, Belarus, Argentina, South Korea and Malaysia could increase use of the RMB beyond its borders. (Citi) Most of these swaps support trade between these countries.
# Allowing more use of the rmb outside China's borders might increase demand for the currency even if it shifts the burden of exchange rate fluctuation to Chinese trading partners. These are steps towards the full convertibility and capital liberalization that would be needed for the RMB to have a global role.
# Roubini: At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China's currency swaps and RMB bonds in HK are steps along this path
# A more flexible yuan, especially one that could have a share in the region's transactions and as a store of value could reduce demand for the US dollar, increase the yields on US treasuries and cost of financing the US deficit.
# China has been expressing concerns for a long time about the long-term value of its USD reserve holdings (Gao) but so far it has continued to purchase US treasuries and to swap some of its past holdings from more risky US assets to treasuries. ie although China's reserve growth has slowed, its holdings of US treasuries have accelerated
# In a trial, Shanghai plans to use the yuan for settlement in some large projects in ASEAN, Hong Kong and Macao, as well as Russia. The losses on foreign exchange transactions have eaten into Chinese exporters' profit in foreign trade.
# ChinaStakes: SAFE plans to allow Chinese banks to open domestic foreign exchange accounts for overseas institutions. This will also provide foreign exchange accounts for SOEs undertaking international investment and M&A. Previously, only foreign banks have been allowed to open foreign exchange accounts for overseas institutions.
# Deposits in Chinese-currency accounts at Hong Kong banks soared more than 40% in early 2008, to 47.8 billion yuan, or about $6.8 billion. Yuan bank accounts were introduced in Hong Kong in 2004 and Chinese financial institutions began issuing yuan bonds in Hong Kong in 2007 (Reuters) but the investment in RMB slowed sharply after regulations restricted the number of RMB bonds and
# Shen: The yuan is likely to become a regional currency because of China’s expanding trade links before it gains acceptance as an international reserve currency. To ensure access to China’s steadily growing markets, ASEAN may have to settle their transactions in yuan. PBoC should widen the daily trading band of the yuan against the US dollar, now capped at 0.5% per day. After becoming a settlement currency, the next logical step would be for the yuan to become a regional reserve currency.

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