China's 'little dollar' spreads its wings By Reginald
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At the beginning of 2010, it is a time to reflect not just on the
economic disintegration caused by the still ongoing global financial crisis, but
to also see the beginnings of new institutional frameworks rising from the
The implementation of the China-ASEAN (Association of Southeast
Asian Nations) free-trade pact, besides the obvious wins for both sides, will
prove to be a vehicle for a large
of the currency landscape in East Asia,
accelerating the prevalence of the yuan as a regionally accepted currency
alongside local currencies and the US
No, the yuan is not about to be allowed to become freely
exchangeable. So its circulation will still
have limitations. However, as China becomes the dominant trade partner for the
states of Central and Southeast Asia, the yuan will easily become a main currency of
commerce, despite a lack of formal international frameworks.
trade with its Asian neighbors is growing at a blistering pace. According to
ASEAN statistics, total trade with China by
ASEAN states in 2008 reached US$192 billion, just shy of overtaking its two
largest trading partners, Japan and the European
Union. However, the close proximity of China, bordering many of the 10
ASEAN nations, means that cross-border trades, often transacted in cash, have
brought large amounts of yuan into these nations where they are even accepted in
stores alongside local currencies for domestic purchases.
process is playing out in Mongolia, the Central Asian states, and North Korea. Some countries such as Nepal and
Cambodia have freely allowed circulation of the yuan to improve commerce.
Hard statistics on the amount of yuan circulating abroad are difficult
to come by. No public statistics are kept by the central government and most
numbers are thus published by researchers using data from the border crossings
where yuan cash-in-transit has to be reported. In particular, the main routes of
yuan to Southeast Asia are through the borders of China's Yunnan and Guangxi
provinces; into Central Asia territories such as Kazakhstan and Kyrgyzstan via
Xinjiang; into Mongolia and Russia through Inner Mongolia or Heilongjiang; and
into North Korea through Jilin province.
The latest firm statistics are
reported by Wang Liyuan in 2005 and Tao Shigui of Nanjing Normal University in
2006. Comparing the estimated yuan cash in circulation in neighboring countries
from 2001 to 2004 shows some surprising statistics.
In 2004, an
estimated 21.6 billion yuan (US$3.2 billion at the present exchange rate)
circulated in bordering countries. By 2009, this was estimated to be over 30
billion yuan. Traditionally, the largest repositories for foreign yuan have been
the special administrative regions of Hong Kong and Macau. Together, in 2001,
they held 45% of foreign circulating yuan. By 2004, this share had dropped to
only 23% at 5 billion yuan.
They were exceeded by Vietnam, where an
estimated 6.4 billion yuan circulated in 2004, 30% of the total. According to
another article by Wang Rong, by 2006, 96% of all cross-border transactions at
the Chinese border with Vietnam in Guangxi province were transacted with yuan.
The remaining 4% were transacted in US dollars.
Myanmar, China's close
ally, tied the total Hong Kong/Macau circulation amount, having 5 billion yuan
circulating within its borders. However, due to Myanmar's lower gross domestic product and unstable currency, the
yuan has become much more important to daily transactions, especially in the
north, and has become known throughout the country as the "little dollar".
An even more striking case is North Korea. North Korea's yuan in
circulation in 2004 was an estimated 2.75 billion yuan; it had by then grown
over 900% from only 300 million yuan in 2001. This rapid growth is tied to a
burgeoning black market in North Korea capitalizing on trade with China whose
nexus is at Changbai, a city on the northern shore of the Yalu River in Jilin
province. The relative international isolation of Myanmar and North Korea,
combined with their dependence on Chinese trade, makes the yuan circulation
within these countries much more important despite the lower overall numbers
compared with Hong Kong, Macau, or Vietnam.
Of the other countries
bordering China, only Mongolia, Laos and Russia seem to have substantial yuan,
with 1.25 billion, 650 million and 500 million, respectively. Together, the
Central Asian countries could only account for roughly 25 million circulating
yuan, according to statistics. For countries not bordering China, the numbers
are more uncertain, with Thailand being estimated to have 4.4 billion yuan in
circulation, and the rest being uncertain.
The Chinese government is not
standing by and taking a hands-off approach to the spread of the yuan. Over the
past year, China has completed currency swaps worth 650 billion yuan with
several countries and territories, including Hong Kong, South Korea, Indonesia
and Malaysia, and even as far off as Argentina and Belarus.
of a currency swap is to exchange a large amount of the two currencies of each
nation at a fixed rate in order to allow trading partners to have yuan on-hand
for convertibility or foreign exchange reserves if necessary. Since the yuan is
not freely convertible otherwise, it is nearly impossible for governments to
aggregate large amounts of yuan at relatively stable market rates. In
addition, the regionalization of the yuan is having some unintended help from
several nations that are experiencing severely high inflation, such as Myanmar,
or which have recently devalued, such as Vietnam and North Korea. The loss of
value of these currencies and the importance of Chinese suppliers to local
businesses will likely strengthen the hand of the yuan as a means of regional
This regionalization is welcomed by China as a first step in
making the yuan a global currency. It will one day be followed by a free
floating yuan, though this will happen in accordance with a strategy of China's
rising economic power and interests rather than due to pressure from Western
trading partners. Though the yuan may not be a global currency for years, it is
now an essential part of the East Asian
Reginald Smith is at the
Bouchet-Franklin Institute in Atlanta, USA.