China positioning its currency for a run at world supremacy

But given the risk of inflation diminishing the value of the dollar, and neither the euro nor the Japanese yen viewed as attractive alternatives, Chinese and Western analysts say they can envision the yuan becoming the dominant global currency by 2020. That's when Beijing expects the yuan to have been fully liberalized, institutional arrangements and rules to have been set, and Shanghai to be firmly established as an international financial center.

"That's a reasonable timetable," said Tim Condon, chief Asia economist for ING Financial Markets in Singapore, adding that the outlooks for the U.S. and Chinese currencies go in opposite directions. "I see undesirable risk against the dollar and appreciation pressure on the Chinese yuan."

For the Chinese, that's not necessarily a good thing at the moment. China holds about $2 trillion in foreign exchange reserves, about half in U.S. Treasury bonds and other government-backed debt. A weakening dollar would erode the value of those investments. Yet any sudden or large move to shift those funds could destabilize the dollar and cause just such a scenario to unfold.

At the same time, the yuan is widely thought to be undervalued. American manufacturers and politicians have long complained that China manipulates its currency to boost exports. By keeping the yuan's value artificially low, critics say, China enables its manufacturers to sell their goods more cheaply in overseas markets. If the exchange rate -- currently pegged at 6.8 yuan to the dollar -- weren't tightly set by Beijing, even Chinese analysts figure the ratio could drop to 5 yuan to the dollar.

Given China's heavy reliance on trade and related investments for growth, Beijing can't afford to let the yuan appreciate too quickly. To reduce those risks, it needs time to continue to grow its economy and transfer more of its economic output to services and the domestic sector.

A shift from the dollar to the yuan as the global currency would have significant practical and symbolic consequences. The dominance of the dollar in trade, financing tools, commodity pricing and international payments has given the U.S. a big advantage in driving commerce and funding the running of the country, although that's also allowed Americans to spend more than they produce and save.

Psychologically, the unseating of the dollar would send a signal that the U.S. is losing its stature as the world's supreme economic power.

Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, cautions against getting too excited about the central government's recent moves, including the announcement last week that Shanghai would be built into an international finance hub. He says there's a long way to go before the yuan can become an international currency.

At the moment, the yuan is traded in the open market in only a few small countries such as Romania. "It's not so meaningful to talk about this right now, when the renminbi is not yet convertible," Yi said.

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don.lee@latimes.com