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The expansion of a pilot program aimed at settling cross-border trade deals using the yuan, and Saturday's announcement of a more flexible exchange rate regime, are early indications that efforts are underway to internationalize China's currency.

The move, if successful, will also see the renminbi effectively compete with the dollar for pre-eminent status in world trade. Six ministries issued a joint statement Tuesday saying the pilot project, introduced in July 2009, has been broadened to 20 provincial regions in order to better facilitate trade and investment.

Deepening the pilot program is certain to encourage wider adoption of the renminbi in cross-border trade deals.

If more companies settle trades using the yuan it will certainly mitigate exchange rate risks.

Internationalizing the yuan is a natural progression resulting from the nation's unusually strong economic growth shown over the past decade. The currency has already been widely accepted in Southeast Asia, especially after China and the Association of Southeast Asian Nations entered into a free trade agreement earlier in the year.

In effect, internationalizing the yuan must be seen as mirroring China's economic might. And, it is a market oriented push rather than a government-mandated effort.

Yet, the move faces significant obstacles.

The quantum of renminbi holdings overseas is still limited, and importers are discouraged from paying Chinese exporters in yuan, as there is strong expectation that the renminbi will appreciate rather than depreciate over the longer term.

Plus, complete internationalization of the yuan will have to wait until such time when the country's foreign exchange mechanism becomes more market oriented.

Though the renminbi's current position significantly lags that of the dollar's, it at least gives the global market place an optional reserve currency, and makes more convenient trade and investment since China is the world's largest exporter.

(China Daily 06/24/2010 page8)