A new financial geography is emerging and China is shaping its contours. The world's second-largest economy is making steady and insidious gains in internationalising its currency — the question is, whether the Chinese consider this the time ripe to make the yuan freely convertible.
Two years ago, when the People's Bank of China called for a new international reserve currency, it came with a lot of bluster, as Beijing remained firm on retaining control over exchange rates.
But it did have a plan up its sleeve. With quintessential Chinese pragmatism, planners went about popularising the yuan through the trade settlement route, rather than allowing a free float, promising that the currency will be freed at the ‘right time.'
So when exactly will the ‘right time' come? China's gigantic global trade volume gave its government the aggression to launch and expand international trade settlement schemes and create a yuan-denominated bond market in Hong Kong.
Bit by bit it is picking up the pace.
Last week, the central banks of China and Australia signed a $31.74 billion (Dh116 billion) currency swap agreement for an initial three-year period.
This comes soon after the People's Bank of China signed supplementary currency swap agreements with the Bank of Mongolia, doubling the scale of a 2011 bilateral swap deal.
Since the outbreak of the global financial crisis, China has signed currency swap agreements worth $238 billion with 17 countries and regions, including South Korea, Hong Kong, Belarus, Kazhakstan and Uzbekistan, all aimed at reducing the use of the US dollar in bilateral interactions. Latin America and the Caribbean nations have also joined the bandwagon as China became the third largest foreign investor in the region.
Lately, the government expanded a cross-border yuan settlement pilot programme allowing all import-export companies to settle their export transactions in the yuan, instead of only selected firms.
Ever since it started the pilot programme in July 2009, China's cross-border trade settlement in yuan hit 2.58 trillion (Dh4.4 trillion) by the end of 2011.
The trend towards greater use of the yuan will be profound in the Middle East too. China and the UAE signed a $5.5 billion currency swap agreement in January; but so far yuan settlements in the UAE have been limited to large retailers and commodity importers.
Now, the Dubai International Financial Centre (DIFC) plans to start settling and clearing transactions in RMB this year with the city revving up the pace to become the biggest offshore centre for yuan settlement in the Middle East.
Once the RMB settlement comes into force, it will allow financial institutions operating in DIFC to clear their transactions in yuan bringing down the cost of trade for companies.
A small number of international banks in the UAE are already tapping into this sector as 60 per cent of China's total trade passes through the UAE for re-export to Africa and Europe.
However, even as it attempts to universalise its currency, China remains hyper-cautious about making the yuan fully convertible.
As of now it is seen to be enthusiastically developing the offshore yuan-denominated bond market, also known as dim-sum bonds.
Last week, the Bank of China unveiled a trading headquarters in Shanghai that will oversee the bank's yuan asset trading business.
The China Banking Regulatory Commission has authorised it to conduct business in the proprietary trading of yuan-denominated bonds and money market instruments.
However, allowing the domestic markets to fully open up with free movement of capital is not on the horizon just yet and dithering on this can only be self-defeating.
Financially resourceful investors from Gulf countries increasingly seek alternative high-yield investments beyond the European and North American markets.
There are calls on Chinese companies to list in Dubai.
UAE companies, especially in the energy and real estate sectors, have shown an interest in listing in China once the international board in Shanghai opens.
The tempo is high and the yuan is predicted to become the third-largest international currency by 2015. It is up to China to step up and provide a better playing field.