"CEAC Commentary" introduces news analyses andopinions in Japan on the concept of an East AsianCommunity, but they do not represent the views ofCEAC as an institution.

April 22, 2009

China Makes a Step forward towards a RMBCurrency Area
By MURASE Tetsuji
In December 2008, the Standing Committee of the State Council of thePeople's Republic of China decided to allow its currency, Renminbi (RMB), to be
used in international transactions with some of its trade partners; it will be allowed,
as a part of a pilot project, to be used to settle trade payments between a) Hong Kongand Macao, and the Pearl and Yangtze river delta regions including Shanghai as well
as Guangdong province, and b) ASEAN member countries and the Guangxi Zhuang
autonomous region as well as Yunnan province. Actually, the RMB had already beenused as settlement currency in China's authorized border trade with Mongolia, NorthKorea, Myanmar, Vietnam, etc. But with the above decision, the State Council aims
for a full-fledged pilot project that involves major trading areas. Thus, this marks afirst step on the road to making the RMB an international currency.
In order to settle trade payments in the RMB, foreign banks that financeexporters and importers must keep RMB accounts and be authorized to buy, sell andhold the RMB required for the settlement. Foreign (non-resident) banks should be
able to open RMB accounts and to undertake spot and forward exchange dealings inthe Shanghai market. To begin with, the Bank of China’s Hong Kong subsidiary andHongkong and Shanghai Banking Corporation (HSBC) in Hong Kong are reported tohave been authorized to open such accounts respectively with the Bank of China andBank of Communications in Shanghai. Hong Kong has started on the path to become
the RMB offshore center.
In order for the RMB to prevail in future intra-regional trade in East Asia, notonly banks but also non-resident traders must be allowed to open RMB accounts(either in China or off-shore). However, as wider possession of RMB among
non-residents should risk speculative selling of RMB, Chinese monetary authorities
would take cautious stance on lifting the ban on the access to RMB accounts bynon-residents in general. In fact, Yi Gang, Vice Governor of the People’s Bank ofChina, said at the National People's Congress in March 2009 that there is no need torush for the internationalization of the RMB (Nihon Keizai Shimbun, March 10,2009).
Chinese academic circles seem to be divided into two groups over thenecessity of a regional monetary regime in East Asia, namely "the cooperation1

school" and "the non-cooperation school." The former argues, from a standpoint ofregional common interests, that the RMB should be pegged to a common currency
basket and be "Asianized" by stabilizing effective exchange rate, while the latterargues that it is not important or even damaging to Chinese national interests topromote monetary cooperation in East Asia, because China is gaining a competitiveedge in the region, which will lead to an "RMB currency area" eventually. Bothgroups agree that RMB, against the backdrop of rapid economic growth of China,
will in the long run become one of the key currencies in Asia.
The year 2009 is likely to be recorded as the one in which China marked thefirst important step towards a "RMB currency area." It remains to be seen exactly
what will become of it, but it is at least certain that RMB has now started to gointernational, though only to a limited extent. Japanese leaders must seriously
discuss what the currency regime in the region should be and how Japanese Yen and
RMB should be positioned in Asia. We have no time to lose.
(This is the English translation of an article written by Mr. MURASE Tetsuji, Professor of
Ryukoku University, which originally appeared on the BBS “Hyakka-Somei” of CEAC on
March 31, 2009.)

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