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Yuan as Asia single currency unlikely without reforms

Asia is far too diverse in terms of economic development standards to utilise a single currency while China still lacks certain necessary fundamentals for the liberalisation of the yuan

Olivier Languepin

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While some observers argue the Chinese renminbi could emerge as the potential rival to the US dollar and dominate Asia’s currency market, the chance is likely to be remote for at least the next two decades, according to experts.

Jae-Ha Park, a deputy dean at the Asian Development Bank Institute, said a regional single currency model is unrealistic for the Asian region given the diversity that exists amongst countries.

”Asia is so much more diverse than the European countries for any regional single currency to prevail,”

he said, adding that the economies of Laos, Myanmar and Cambodia pale in size when compared with Japan, South Korea or China.

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A fully convertible currency is one of the criteria the US and Europe are demanding from China as a condition for allowing it to be part of the International Monetary Fund’s currency basket

Dr Park said implementing exchange rate stability mechanisms will provide a better solution to curbing exchange rate fluctuations, thereby enhancing trade and investment.

Xu Qiyuan, secretary general of the Research Center for International Finance (RCIF) at the Chinese Academy of Social Sciences (CASS) echoes similar concerns, saying that the renminbi is not completely ready to be internationalised.

The exchange rate should first be led by the market and should be at the right level before any internationalisation can take place.

”If there are distortions that could contribute to the over-valuation or undervaluation of the currency, then liberalisation will bring about arbitrage between the offshore and onshore market,”

Dr Qiyuan said, adding that the exchange rate regime [of the Renminbi] is currently not completely decided by the market.

via Yuan unlikely to rule in short term | Bangkok Post: business.

Yuan could be fully convertible by 2015

Chinese officials told European Union business executives that the yuan will achieve “full convertibility” by 2015, Bloomberg quoted EU Chamber of Commerce in China President Davide Cucino as saying.

“We were told by those officials by 2015,” Cucino was cited by Bloomberg as saying, declining to identify the government departments involved. People’s Bank of China Governor Zhou Xiaochuan said that while there is no timetable for convertibility, the offshore yuan market is “developing faster than what we had imagined”.

According to Bloomberg, China has accelerated the use of the yuan in international trade and investment to curb its reliance on the dollar. A fully convertible currency is one of the criteria the US and Europe are demanding from China as a condition for allowing it to be part of the International Monetary Fund’s currency basket. A 2015 target would be a year faster than the schedule expected by 57 percent of 1,263 global investors in a Bloomberg survey published in May.

“Making the yuan fully convertible will lead to foreign inflows into China and a stronger yuan,” said Sacha Tihanyi, a Hong Kong-based strategist at Scotia Capital.

“Making the yuan fully convertible is also the key step in pushing it as a reserve currency and enhancing its use in global trade.”

Undervalued Yuan

Most analysts estimated that the yuan as of 2010 was still undervalued by 25 to 40 percent, which gives China a huge advantage in international trade. U.S. manufacturing groups blame the Chinese currency for a loss of more than 1 million jobs. If the United States formally labels China a currency manipulator it can claim that China uses a low-valued yuan to give it an unfair trade advantage and the yuan can be treated as subsidy that boosts duties on Chinese imports.

Non-Chinese have argued that a stronger yuan will not only help foreign countries it could benefit China by reducing its reliance on exports and generate strong demand at home, which some argue marks the path for more stable sustainable growth in the future. According to the Economist: “In the long run, a stronger yuan would benefit China’s economy—and the world’s—by helping shift growth from investment and exports towards consumption. It would boost consumers’ purchasing power and squeeze corporate profits, which have accounted for most of China’s excessive domestic savings.”

How to go about increasing the value of the yuan is a matter of some debate. Increasing its value slowly would encourage speculators and create dangerous hot-money inflows. Raising it in a dramatic one-off increase would put many exporters out of business overnight.

According to the Economist:

‘Some Chinese economists warn that the benefits to the United States for the yuan revaluation are much exaggerated. In particular, a stronger yuan would not significantly reduce the U.S. trade deficit. There is little overlap between U.S. and Chinese production, so U.S. goods could not simply replace Chinese imports. Instead, consumers might end up paying more for imports…This would be like imposing a tax on U.S. consumers.”

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