Yuan may be reserve currency by 2020-China official

BEIJING Wed May 20, 2009 1:23am EDT

BEIJING May 20 (Reuters) - In the latest advertisement of China's currency ambitions, an official suggested on Wednesday that the yuan could make up more than 3 percent of global foreign exchange reserves by 2020.

The yuan CNY=CFXS is not convertible for purely financial purposes, ruling it out as a reserve currency for now, but China has started to carve out a bigger international role for its money.

A pilot scheme will start soon in Hong Kong to use the yuan to settle trade with selected companies in southern Guangdong province; China has signed yuan swap deals totalling 650 billion yuan ($95 billion) since December with six central banks; and on Tuesday two foreign banks said they had won permission to float yuan bonds in Hong Kong. [ID:nSHA239335]

Zhang Guangping, vice-head of the Shanghai branch of the China Banking Regulatory Commission, acknowledged that a series of conditions would have to be met for the yuan internationalisation trend to gather momentum.

China would have to gradually make the yuan convertible on the capital account; it needed a more liquid foreign exchange market; its bond markets and banking system needed to be more developed; and there had to be proper monitoring of cross-border capital flows, Zhang told a foreign exchange conference.

But, hypothetically, he said there was no reason why the yuan could not account for over three percent of global reserves by 2020, the target date for Shanghai to have evolved into an international financial centre.

That would mean the yuan displacing the Japanese yen as the fourth-largest currency in reserve portfolios, behind the pound, the euro and the dollar.

Zhang told reporters later his target was plausible, given the rapid growth of China's economy and outbound investment and its big share of world trade.

"We have the conditions to reach such a proportion," he said.

In late March, central bank governor Zhou Xiaochuan signalled China's intention to play a greater role on the global currency stage by proposing that the dollar be eventually replaced as the dominant reserve currency by a beefed-up version of the Special Drawing Right, the International Monetary Fund's unit of account. (Reporting by Langi Chiang and Simon Rabinovitch; Writing by Alan Wheatley; Editing by Jonathan Hopfner)

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