China set to propel yuan into world big league

China will soon spring a big-bang breakthrough by freeing up its yuan currency and asserting itself as a global financial power, economic guru Olarn Chaipravat said yesterday.

In an exclusive interview with The Nation, Olarn said China is courting worldwide public opinion with its call for the special drawing right (SDR), a currency unit under the International Monetary Fund, to supersede the US dollar as the world's reserve currency.

"China's ultimate aim is to bolster its global economic status by planning to raise the profile of its currency in the SDR.

"China is not worrying about US dollar defaults, but rather it is worrying about the currency risk associated with the wobbling dollar since it holds about US$1.4 trillion (Bt50 trillion) in US dollar assets. US dollar depreciation will hurt China's holding of dollar assets," he said.

The role of the SDR as the world's reserve currency could emerge as one of the most contentious debates at the G-20 Summit in London on Wednesday and Thursday.

The IMF is now managing the SDR as a basket of currencies.

Olarn and his team of researchers at the Fiscal Policy Research Institute suggest that if the G-20 agrees with China's proposal, the yuan will for the first time make a foray into the international league by being incorporated into the SDR.

Now the SDR consists of the US dollar (46 per cent), euro (30 per cent), sterling (8 per cent) and yen (10 per cent). If the yuan steps into the global spotlight, the weighting of the SDR could change to yuan (20 per cent), dollar (30 per cent), euro (30 per cent), yen (20 per cent) and sterling (5-6 per cent), according to the Fiscal Policy Research Institute.

"By doing so, the Chinese yuan will have to go through a big-bang reform and will become fully convertible," Olarn said.

"It's simply an accounting method when China allows its currency to be included in the SDR because it can issue its own currency at no cost.

"Then the yuan can also develop into another reserve currency. The Bank of Thailand can also hold the yuan as one of the reserve currencies," Olarn said.

The dollar's role will not dim overnight, but the yuan will surface to stand side-by-side with other global currencies, he said.

China has been quietly preparing for the free exchange of its yuan and the new global currency realignment, as evidenced by its move over the past five months to rigidly peg the exchange rate at 6.83 yuan to the US dollar.

Since China is one of the major creditors of the US, the US cannot complain about this arrangement, which sets the stage for a smooth transition for the convertibility of the yuan. The yen has also been steered to hover around 97-98 to the US dollar in recent times to support the greenback. While China's Finance Ministry would like the internationalisation of the yuan to take place gradually, the Bank of China would like to see it happen overnight.

"I guess China will make the big-bang reform of its currency very soon," Olarn said.

Europe wants to welcome China into the club of the global players sooner because it would like China to help bear the cost of recapitalising the IMF, which would need $500 billion to $700 billion to bail out the Eastern European economies.

Japan will also have no reason to keep China out, and the US is in no position to prevent China's birth as another superpower.

"China is now attempting to what amounts to a back-door listing in the IMF," Olarn added.