More yuan denominated transactions in Asean-China FTA

The centralbank chief was quick to add that the increasing role of the yuan will be gradual, as China still had to meet several challenges - from allowing its currency to be fully convertible and liberalising its financial markets to improving transparency in its rules and regulations.

"We expect to see more yuandenominated transactions next year after the introduction of the freetrade area between China and Asean," said Tarisa.

"The freetrade area provides opportunities and challenges for us. Instead of dealing with only a Thai market of 67 million people, we can have a larger market of 600 million people in Asean and close to 2 billion people in Asean and China combined."

Asean statistics show the trade value between the regional grouping and China increased from US$59.6 billion (Bt1.98 trillion at today's rate) in 2003 to $171.1 billion in 2007, a growth rate of about 30 per cent a year.

"The step forward is for Asean to integrate further with China, South Korea and Japan, because we cannot rely on the G3 countries like in the past. Both the US and Europe are facing economic difficulties."

However, Tarisa discounted the possibility of the region having a single currency unit similar to the euro soon.

"As for the timing of a single currency, I think this will not happen any time soon. It will take quite a long time," she said.

Besides, it will not be easy for China to promote the yuan as one of the world's reserve currencies to rival the domination of the US dollar. The dollar, which became the global currency after World War II, has benefited from the superpower status of the US, the size of the US economy, the massive liquidity and the depth of the US financial markets.

Tarisa said the dollar was on a declining trend and needed to stabilise its macroeconomic conditions, although in the short term investors or funds will buy up the dollar because of its safehaven status whenever there is panic in the financial markets.

Fiscal Policy Research Institute director Kanit Sangsubhan expressed support for bahtyuan trade. A highly volatile dollar had adversely affected international trade, he said, and he urged the BOT to offer more incentives to commercial banks willing to participate in the scheme.

Bahtyuan trade would benefit both sides as bilateral trade has increased recently. At present, 10.2 per cent of Thailand's exports go to China, he added.

Tarisa downplayed concerns over the macroeconomic deterioration in Vietnam, which recently raised its interest rate and also devalued its dong by 5 per cent.

Tarisa explained: "Earlier this year, Vietnam faced high inflation of 67 per cent, which added to the production cost. So when it devalues its currency by 5 per cent, the benefit from a weaker currency is offset."

Vietnam enjoys export competitiveness over Thailand in lowquality rice, footwear and textiles. But Tarisa said Thailand could not compete against Vietnam in these products even before Vietnam faced economic difficulties.

As for the possibility of the baht breaking the 33 level against the dollar, Tarisa said the BOT did not set any foreignexchange targets.

"It could happen or it may not happen, depending on several factors and market conditions. All we need to do is to look after the baht so it won't fluctuate to the extent that it hurts the normal business operations of Thai companies," she said.

Tarisa also defended the central bank's management of the baht. She said it was moving in the middle of the pack of regional currencies, appreciating less than the South Korean won, the Indian rupee, the rupiah and the Taiwanese dollar, while appreciating faster than the ringgit and the Singaporean dollar.