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Fully convertible yuan by 2015?

According to Bloomberg, China has accelerated the use of the yuan in international trade and investment to curb its reliance on the dollar

Boris Sullivan

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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.

dollar yuan foreign currencies

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

“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.”

via Yuan will be fully convertible by 2015 | Economy | chinadaily.com.cn.

But the obstacles to a shift away from the dollar are still formidable. A useful global currency provides three necessary functions: It should serve as amedium of exchange for cross-border transactions, a unit of account to determine prices, and a store of value for those wishing to hold liquid assets.

Measures like official currency reserves, invoiced international transactions, and international debt securities confirm that the dollar still surpasses any other currency in providing a unit of account and a medium of exchange. As a store of value, however, the dollar has become more suspect. Gyrations in the price of gold and the exchange rates of the Australian dollar and Swiss franc suggest at least a modest effort to diversify away from the greenback.

http://www.foreignpolicy.com/articles/2011/09/07/the_buck_stays_here

An Asian currency unit should be used as the benchmark currency of the countries in the region if they want to efficiently cope with currency exchange fluctuation, according to former deputy prime minister and finance minister Pridiyathorn Devakula.

Thailand should study what China achieved in controlling the yuan by exchange rate targeting if it wants to control the baht’s movement in the long run.

He said it was unwise to allow the baht to float amid capital flows into Asia because it could make the currency fluctuate heavily.

The adoption of an Asian currency unit as the benchmark currency of the countries in the region is another efficient approach to curbing the currency exchange volatility because it could make currencies in Asia move in the same direction.

An Asian currency unit should be used as the benchmark currency of the countries in the region if they want to efficiently cope with currency exchange fluctuation, according to former deputy prime minister and finance minister Pridiyathorn Devakula.

Fundamentals remain strong and Thailand continues to be an attractive place to do business. The government’s GDP growth forecast for 2010 was recently increased to 6.5%-7.5% on the back of continued strong export growth and sustained domestic demand.

The currency and the stock market are at all-time highs. This strong rebound is again proof of the resilience of the Thai economy to the political uncertainty.

Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lender–borrower relationship.

To prevent currency values collapsing, these countries’ governments raised domestic interest rates to exceedingly high levels (to help diminish flight of capital by making lending more attractive to investors) and to intervene in the exchange market, buying up any excess domestic currency at the fixed exchange rate with foreign reserves.

On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June 1997, Prime Minister Chavalit Yongchaiyudhsaid that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the basket of currencies, where U.S. dollar was the main component, against international speculators.

Thailand’s booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers being sent back to their home countries. The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%.

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