Thursday, January 13, 2011

Chinese currency trading - will be improving

Yuan trading developments this month have accelerated with the Bank of China now allowing customers to trade yuan outside mainland China. Starting last July trading was allowed in Hong Kong.This is another step to convertibility.

From WSJ: Chinese regulators last month increased the number of exporters that can use the yuan to settle international transactions from a few hundred to nearly 70,000. Some analysts have predicted that it will be only a few years before 20% to 30% of China's $2.3 trillion in imports could be conducted in yuan rather than dollars.

There is a long way to go before we reach convertibility, but the Chinese government is taking all of the right steps to make the yuan a major currency. Convertibility with size makes for a foreign exchange powerhouse, but it should be noted that Japan was never able to gain trading dominance from its export power. Capital flows have to be free and there has to be a willingness to allow for open trade. We have a way to go before this is allowed with the yuan.

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