Yuan influence should cross borders

In March, investment firm Pimco cut its holdings of US government-related paper to zero for the first time in the history of the firm.

As the biggest overseas creditor of the US government, the Chinese government's holdings of US treasuries are facing the risk of inflation, drop in value and low yields. The major question for the Chinese government is that if it continues to accumulate foreign exchange reserves, the risk will rise and if it didn't do this, it is hard for China to make a structural adjustment to change the current situation. Therefore, promoting the international use of the yuan will become a way to reduce the country's reliance on the value of US treasuries. The country won't need to hold US dollar assets and risk capital losses on its foreign-exchange reserves.

China's growing economic strength is an important internal factor for the government to accelerate the internationalization of the yuan. In 2010, China surpassed Japan to become the world's second-largest economy. If yuan can become one of the world's major reserve currencies, it would provide China with more freedom to maneuver in domestic and international economic policy.

In the past 100 years, it has been rare to see that the currency of the world's second largest economy was not an internationally used currency.

When dealing with cross-border trades and investments, China has to bear the risk of volatility of the third country's currency exchange rate.

Moreover, historical experience shows that, it takes a long journey for a country to be among the world's major economies and then to become a nation with its currency as the world's reserve currency. For example, it took half a century from the period of time when the United States surpassed the United Kingdom to become the world's largest economy, to the period of time when the US dollar replaced the pound as the most important reserve currency in the world.

Thus, with the acceleration of its economic strength, the Chinese government has the internal motive to promote the yuan as an international reserve.

Given the fact that it will take a long time for a currency to replace another currency, the Chinese government should start its plan for yuan internationalization as soon as possible.

The move will certainly help Chinese companies to reduce exchange-rate risks. It will also increase the funding efficiency of Chinese financial institutions and strengthen their competitiveness in global financial markets. It will also boost China's trade with its neighbors, owing to the reduction in transaction costs.

From the perspective of the political economy, the promotion of the yuan as the international currency at this stage may be one of the reforms that could face fewer obstacles from vested interests group. When China's reform and opening-up goes further, the reform will result in the redistribution of interests.

Wealth redistribution will undoubtedly lead to opposition from vested interests, so future reform is destined to be difficult. The internationalization of the yuan on the surface does not seem to harm the interests of any interest group, so it has become one of the reform initiatives for the Chinese government, particularly the People's Bank of China.

The author is a scholar with the Chinese Academy of Social Sciences.

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