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China's RMB Warms Up to Head Abroad
Summary:

News, page 6, issue 412, March 30, 2009
Translated by Liu Peng, Zhang Junting
Original article:
[Chinese]

Chinese officials were looking into the internationalization of the Renminbi (RMB) on the eve of London's G20 summit, which would have world leaders attempt to tackle the financial crisis.

A ministry-backed research institute recently submitted a report on the RMB's internationalization to the State Council, the country's cabinet, advising a gradual loosening of currency exchange under China's capital account.

"We started to do research on this topic in 2005," a source familiar with the report told the Economic Observer (EO). He pointed out that the liberalization of the capital account was a key phase for the RMB's internationalization process.

Such a process had thus far been confined to a pilot project promoting the
 usage of the RMB to settle bilateral trade payments with Hong Kong and ASEAN (Association of Southeast Asian Nations) members.

A source from the government-backed Export-Import Bank of China revealed to the EO that some 50% of trade between China and ASEAN members had been settled in RMB.

"From regionalization to internationalization, this is the roadmap for the RMB to become an international currency," said Xia Bin, who directed finance research under the Development Research Center of the State Council.

Many domestic scholars have reached a consensus that the financial crisis created a window of opportunity for the RMB to head abroad, and advised the government do its utmost to enlarge currency swap cooperations with other countries.

The EO learned that Chinese policy-makers had set the tone for the RMB's development at the central economic conference last December. The conference held that the US dollar's position as an international currency wouldn't be changed in the short term and that China would have to continue to purchase US bonds. Although it would likely depreciate against the RMB, it would remain stronger than the Euro or Yen.

Top Chinese policymakers admitted then that the US dollar was still a dominant international currency, but also that the present situation offered an opportunity for the RMB's internationalization. They projected that RMB would become a more popular currency in the region.

And while Chinese policymakers made slow advances in promoting the RMB, the dollar went under assault.

In late March, just before the G20 summit, Zhou Xiaochuan, governor of China's central bank, published an article on the bank's website suggesting the creation of a new international reserve currency - special drawing rights managed by the IMF - to replace the dollar. The article triggered wide discussion and was interpreted as a challenge to the US dollar.

Though Zhou didn't exclusively target the dollar, "the proposal showed his dissatisfaction towards it, thus pressuring the US and challenging its power," said Cao Honghui, a scholar at the Institute of Finance and Banking of Chinese Academy of Social Science.

Many Chinese economists though, doubted the feasaibility of Zhou's proposal in the short term, and interpreted more as a signal.

US president Barack Obama has since publicly defended the dollar and dismissed the idea: "I don't believe that there's a need for a global currency," he told a televised news conference last week, adding that the dollar is "extraordinarily strong right now".

Almost at the same time, China's vice-premier Wang Qishan contributed to UK paper the Times, appealing for an increase in China and other developing country's say in the International Monetary Fund (IMF). In the current IMF voting framework, the EU had 32 percent and the US 17 percent, compared with China's 3.7 percent.

"The RMB still has a long way to go in its road to internationalization," said a source from Finance and Banking Institute under China's Academy of Social Sciences, adding "We are now trying our best to gradually enhance the RMB's international influence."

China has already signed bilateral currency swap agreements worth 650 billion yuan (over 95.1 US billion dollars) with various countries. 

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