By Stephen Morgan.

Internationalisation of the Chinese yuan moved a step nearer with Japan’s decision to buy 65 billion yuan (£6.5 billion) of Chinese government debt.  Japan’s finance minister announced on Tuesday 13 March that the Chinese government had agreed to the purchase. He added that it would not begin for some months until administrative matters were sorted.

The decision is symbolic in many ways. It is not only the largest purchase of Chinese official debt denominated in yuan. It moreover highlights the increasing acceleration in the use of the Chinese yuan as an international currency.

A few years ago everyone pooh-poohed the idea that the Chinese yuan could become an international reserve currency akin to the US dollar or the tarnished Euro. The currency was non-convertible and there was no way the Chinese state would make it so in the near future, it was argued. It still isn’t convertible, at least readily. But there are ways to exchange large quantities of Chinese yuan, such as the Qualified Foreign Institutional Investor (QFII) programme, a quota system, that is intended to enable portfolio investment.

But many observers have forgotten their financial history. The US dollar overtook Sterling, the British pound, to become the major international currency in barely more than a decade between the mid-1910s and mid-1920s. Before World War I, most international trade was settled in Sterling; by the late 1920s more than half of world trade was being settled in US dollars. What allowed that transition was the commitment of American policy makers to institutional support (in particular the creation of the Federal Reserve).

And China? Sure there are huge obstacles. China’s financial system regulation is anything but transparent. Much needs to be done to create confidence in the yuan. But over the past three decades we have too often underestimated the flexibility of the Chinese State, its vigorous embrace of capitalism, and the speed with which change has occurred in the economy and society (but far less so in the inner-workings of the Party-State itself).

So we should not be too surprised if the Chinese yuan becomes an international reserve currency more quickly than many pundits suggest. Growing volumes of China-Hong Kong border transactions have been settled in yuan in recent years. But others are joining in too. Argentina, Malaysia and other countries have struck agreements with China to settle trade in yuan. In 2011, nearly 10 percent of China’s trade was settled in yuan, up from less than one percent in 2010. Clearly the yuan is fast striding forward far beyond China’s borders.

A closing thought: Have you opened your yuan-denominated bank account yet? That might be a prescient thing to do.

Dr Stephen Morgan is Senior Fellow of China Policy Institute, and Associate Professor of School of Contemporary Chinese Studies, University of Nottingham.

Opinions expressed in the CPI blog do not represent the views of the China Policy Institute or the School of Contemporary Chinese Studies at the University of Nottingham. They are the personal views of the bloggers/authors.



  1. It’s a great point on the GBP vs USD deval. Let’s see whether the history of these two currencies repeats itself in the yuan context and what happens along the way.

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