Commentary: The Yuan Moves Up

For months now, Beijing has expressed its dissatisfaction with the dollar as the de facto international currency. Now it is slowly making the renminbi available as an alternative.

China this week began allowing the renminbi, also called the yuan, to be used to settle some cross-border transactions. About a dozen transactions between the mainland and Hong Kong amounting to $1 million were made soon afterwards.

"The deal marked a critical step for the yuan to become a world currency," state news agency Xinhua announced. "Amid the ongoing financial crisis, the new service is bound to help warm up international trade, further push the yuan around the globe and alleviate the world's over-reliance on the U.S. dollar."

The program is beginning small, with Beijing allowing renminbi to be used in deals between China and Hong Kong, Macau and members of the ASEAN organization of Southeast Asian countries. But China has obvious designs to give the currency an international status that matches the leadership role China desires for itself.

Global ambition

The ability to use yuan to settle international deals will make life a bit easier for companies that conduct a lot of cross-border trade, easing the strict controls the state using to manage its currency. It also boosts China's status as an economic force on the global stage.

Earlier this year, Chinese officials questioned the status of the dollar as the only option available for an international currency and pushed for alternatives. In March, central bank governor Zhou Xiaochuan argued that a currency created by the IMF could alleviate many of the disadvantages of using the dollar as the single reserve currency.

"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Zhou said at the time.

The yuan, however, is still long way from taking the place of the dollar, which will remain the dominant currency for "many years to come," according to Chinese vice foreign minister He Yafei, the New York Times reported this week. However, HSBC predicts that within three years, cross-border yuan transactions could total $2 trillion, according to the South China Morning Post.

Beijing is careful to avoid the appearance of direct competition with the United States as world economic leader. But the elevation of the yuan as an international currency fits with the role China aspires to. Since the beginning of the economic crisis, China has been acting more confident as it has put up respectable growth numbers and demonstrated impressive stability.

While the yuan is not a global reserve currency, its new convertibility is a step in the direction of greater global importance.