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Commentary

China Pushes Out the Dollar, Asks for Yuan

Xinhuanet: Yuan edges into place as international trade currency

Buyers and sellers at the 105th Canton Fair in south China’s Guangdong Province are no longer restricted to using the U.S. dollar to settle their deals. This year they can also use the yuan, China’s currency.

Last week, the State Council (Cabinet) gave the green light to five major trade cities — Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan — to use the yuan, also known as Renminbi, as an option to settle international trade deals.

Last December, pilot programs were announced to allow the country’s two economic powerhouses, Guangdong Province and the Yangtze River Delta (including Shanghai), to use the yuan to settle trade deals with the two special administrative regions of Hong Kong and Macao.

A similar arrangement has been proposed for exporters in Guangxi Zhuang Autonomous Region and Yunnan Province in south China, which will be allowed to use the yuan to settle trade with ASEAN (Association of Southeast Asian Nations) members starting this year. Details of that program are yet to be disclosed.

China has also been arranging currency swaps with trading partners to bypass the U.S. dollars in trade settlements. Since mid-December, the Chinese mainland has signed currency swap contracts worth 650 billion yuan (95.6 billion U.S. dollars) with central banks in Hong Kong, the Republic of Korea, Malaysia, Belarus, Indonesia and Argentina.

This is quite significant. If they earlier required USD settlement for trades done with Hong Kong and Macau, that kept the dollar demand going. And now, they’re even looking at Asean with the Yuan Renminbi.

India should do this too – what better time than now for such a move! Getting the rupee accepted locally isn’t much of a deal – already much of it happens in Dubai and I’m sure Singapore would be happy too. Plus, we should convert some of our dollar reserves to the Yuan, to facilitate trade.

The US won’t like too much of this. The response will be very interesting; could be to eventually renege on Freddie/Fannie debt, or to coax China back into the fold. But the trade leverage is slowly slipping away with the US recession continuing and deepening. Plus, China has a huge internal growth problem and needs fairly quick and decisive action.

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