While China's proposal for a super-reserve currency did not make tangible progress at the G20 summit, it wasn't meant to. Instead, it did what it was intended to do: allow China -- the largest holder of U.S. debt -- to voice unease about U.S. monetary policy.
At the G20 meeting, Chinese President Hu Jintao called for enhanced supervision over major reserve-currency issuing economies and an overhaul of the international monetary system.
Hu's call was not, Chinese analysts told Xinhua, a signal that China wanted its own currency, the yuan, to supplant the U.S. dollar.
What comes next for the yuan is, however, a challenge for China's policy makers as they manage the world's third-largest economy.
They want the currency to have a bigger global role but are wary of sudden or excessive change, so they are taking gradual steps to make it easier to use in trade and investment. But any major global role might be as long as 10 years to 30 years away, analysts in China admit.
As it has felt the danger of excessive dependence on the U.S. dollar, China has taken new measures to raise the global stature of the yuan, or Renminbi.
Path to global status
The biggest obstacle to the yuan's use as a reserve currency is that it isn't fully convertible. China is seeking ways to change that situation.
The State Council, or cabinet, said last month that it planned to turn Shanghai into an international financial hub by 2020 -- a goal, in the eyes of many experts, that won't be achieved without full convertibility.
The plan "implies that China will eventually make the yuan fully convertible," Xiao Geng, director of the Brookings-Tsinghua Center for Public Policy, told Nanfang Weekly.
He said the repercussions of the financial blueprint for Shanghai extended far beyond the city, because the city's role was part of a national strategy.
It usually took 10 to 20 years for developed countries to achieve full currency convertibility in their capital account. For China, the year of full convertibility was likely to be 2016, Chen Yulu, finance professor and vice president of Renmin University of China, told Xinhua.
He laid out a timetable of global currency status: 10 years to expand yuan's use in neighboring countries and regions, another 10 years to bolster its role in Asia and yet another 10 years to become a reserve currency.
China allowed the yuan to become convertible in the current account on Dec. 1. 1996, but it hasn't yet opened its capital account to foreign investors for fear of a massive capital outflow in the case of a crisis, which could damage the country's financial system.
A few programs have offered foreign investors chances in China's capital market. They include the Qualified Foreign Institutional Investor plan, under which foreign investors can buy yuan-denominated bonds and shares under a quota.
"We should increase the quota and allow foreigners to invest in more types of yuan-denominated assets and financial derivative products, which would bolster their willingness to hold Renminbi," said Xu Mingqi, researcher with the Shanghai Academy of Social Sciences. "More policy support is essential," he said.
China has also been arranging currency swaps with trading partners to bypass the U.S. dollar in trade settlements. Since mid-December, China has signed currency swap contracts worth 650 billion yuan (about 95.6 billion U.S. dollars) with six central banks in Hong Kong, the Republic of Korea, Malaysia, Belarus, Indonesia and Argentina.
These swap accords allow other overseas central banks to lend yuan to local importers who want to buy Chinese goods. Since these deals bypass the U.S. dollar, they reduce exposure to exchange-rate volatility and cut transaction costs for both parties.
Chen said these deals "expand the yuan's use in the region and pave the way for its global acceptance."
The rules are also good for Chinese exporters, who have long had to bill their foreign customers mainly in U.S. dollars.
Last December, China announced pilot programs to settle trade deals in yuan between the country's two economic powerhouses, Guangdong Province and the Yangtze River Delta (which includes Shanghai) and the two special administrative regions of Hong Kong and Macao. Trade value among these regions comprised more than half of the country's total last year.
A similar arrangement has been proposed for exporters in Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China, which will be allowed to use the yuan to settle trade with the Association of Southeast Asian Nations members starting this year. Details of that program haven't yet been disclosed, but experts told Xinhua that it would be yet another step leading to greater use of the yuan offshore.
Smaller arrangements using the yuan in trade actually date back to the 1990s and involve eight close neighbors such as Vietnam, Nepal and Russia. Last year, trade worth 23 billion yuan was settled in yuan between China and these eight border nations.
But at the equivalent of about 3.4 billion U.S. dollars, that was only a minute portion of the trade between China and those countries last year, which was expected to be at least 95.48 billion U.S. dollars.
