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For more than three years, China has been developing a strategic plan to globalize the Yuan. It was announced last week , that China is planning to ex-tend the Yuan-denominated loans to BRICS countries, which would be a significant step in increasing the "people's currency" role in cross border trade settlement.
Will this decision pose a risk to the US Dollar, a key global currency? Will the Chinese currency become alternative global reserve currency? Dukascopy interviewed Roy Teo, FX Strategist at ABN Amro Bank NV, to find out the answers to these questions.
China is planning to extend the Yuan-denominated loans to BRICS in an attempt to boost trade between the leading emerging markets and promote the use of the Chinese currency. How would you evaluate this decision?
This is no doubt a positive step towards internationalisation of the Yuan. The use of the Chinese currency in cross border trade is reducing the reliance of the USD. We believe the road for Yuan to become an alternative global reserve currency is a long one.
Do you see any risks to the Dollar from China's efforts to encourage BRICS economies to extend the usage of the Yuan in international trade?
The USD will remain as a key global currency, as it has the deepest debt market and is the most liquid currency. These are two key important criteria to be an international currency. No doubt, the importance of the USD will be reduced with more countries using the Yuan as an alternative currency for trade settlement.
Treasury Secretary Timothy Geithner said he was skeptical that the Yuan would soon become a world currency. Do you share Geithner's point of view?
Yes, it will be many years before the Yuan become an international currency. However, if you look at the criteria of an international currency as mentioned above: depth of debt market and currency liquidity, China's onshore debt market is one of the largest in Asia and hence meets the criteria. Currency liquidity remains a problem and will be improved with more Yuan swap, cross border trade settlement agreements and improved legislation on FDI and ODI. The opening of capital account also needs to be addressed before the Yuan can be considered as a challenger to the USD as an international currency.