New Global Role Ahead for Chinese Yuan

By Bloomberg News

(Bloomberg) — Hong Kong's former central bank chief Joseph Yam said that the yuan can become the "third pillar" of the global monetary system as deteriorating public finances erode confidence in the dollar and the euro.

"Large budget deficits and public debt, and structural problems in the financial system, mean that the two pillars are not resting on sound foundations," he said at a financial conference today in Beijing. "There is a need for a third currency to serve as a third pillar, which would also give an opportunity for the two weak pillars to heal."

China is promoting greater use of the yuan overseas after Premier Wen Jiabao expressed concern in March that a weakening dollar was eroding the value of the nation's $2.3 trillion in foreign-exchange reserves. The government should allow foreign financial companies and importers to purchase yuan more freely for investment and trade, Wu Xiaoling, a former deputy governor of the People's Bank of China, said at the conference.

China this year allowed 365 companies in Shanghai and the southern province of Guangdong to use yuan in cross-border trade with Hong Kong and members of the Association of Southeast Asian Nations from July 2. The government in October sold 6 billion yuan ($879 million) of bonds in Hong Kong to help elevate the "international status" of its currency.

"China should open its bond market to foreign central banks and financial institutions so they will want to accumulate yuan from exporters and importers, increasing the attractiveness of yuan for trade settlement," Wu said. "We should also allow foreign investors to use yuan held overseas to invest in China's stock market."

Yam forecast China's economy will in 20 years rival the U.S. and Europe in terms of size and this will bolster the yuan's attraction as a reserve currency. Hong Kong is the "ideal testing ground" for China to promote yuan usage, he said.

To contact Bloomberg News staff for this story: Belinda Cao in Beijing at +86-10-6649-7570 or lcao4@bloomberg.net; Li Yanping in Beijing at +86-10-6535-2310 or yli16@bloomberg.net