China's ambitions of making the yuan a global reserve currency may not be completely far fetched. Central banks from Thailand to Nigeria plan to start buying the Renminbi as the Chinese government gradually allows conversion of their currency for investment. Nigeria will reportedly move 10 per cent of its foreign reserves into yuan soon, even as the Bank of Thailand sets up shop in Beijing to assess investments here.
By allowing central banks around the globe to hold the yuan as part of their reserves, China is taking quick steps to internationalise the currency. Despite severe criticism of Beijing maintaining a rigidly controlled currency, financial experts in Shanghai say this actually works to investor advantage. The very predictability and certainty of yuan appreciation in the near future and the faith in the Chinese regime's ability to control its macro-economy makes the yuan an increasingly attractive investment.
Investment has become easier for central banks of foreign countries to access due to the issuing of yuan-denominated bonds in Hong Kong, which more than tripled to 115 billion yuan (Dh66.1 billion) this year. The notes' average yield reached a record high 3.22 per cent late August, at a time when the rate on two-year US Treasury notes sank to an all-time low of 0.18 per cent.
However, making the yuan fully convertible and increasing its use in global trade is an unavoidable step in pushing it as a reserve currency. In any case, a fully convertible currency is one of the main criteria the US and Europe are demanding from China as a condition for allowing it to be part of the International Monetary Fund's currency basket.
According to some reports, Chinese officials have let it be known that the yuan will achieve "full convertibility" by 2015. While there is no timetable for this, the market expects this to come through in the next five years.
China is also accelerating the use of the yuan in international trade and investment to reduce its reliance on the dollar and make the currency more visible. More and more Chinese manufactured goods will now be exported in yuan rather than in US dollars and Africa is becoming one of the major destinations to seek large scale yuan-denominated trade. Yuan settlement is becoming a favourable option as this lowers transaction costs for Chinese exporters and they can access cheaper working capital.