Yuan to someday play major role as reserve currency

Reuters

By Melanie Lee

SHANGHAI (Reuters) - China's yuan will one day play a major role as a global reserve currency, although the U.S. dollar will remain an important currency, European Council President Herman Van Rompuy said on Wednesday.

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"We live in a multi-polar world and a multi-currency world more and more, and that's the case for the rise of the euro as a reserve currency. The dollar stays as an important currency," Van Rompuy said during a visit to a Shanghai business school.

"But in the upcoming decades, there will be huge changes and in the far future the Chinese currency will play a role," he added. "The Chinese currency will play a major role in world reserves because China is so important in world trade and currency; money follows trade."

For that to happen, however, China would need to make the yuan -- also known as the renminbi, or people's currency -- fully convertible, and the government has given no clear indication of when that might happen.

Beijing has been trying to increase the global clout of its currency by promoting foreign trade settlement in yuan and signing bilateral currency swaps with other countries. But analysts believe it will take a long time for the yuan to become a global reserve currency.

Van Rompuy also took the opportunity to press China obliquely on the yuan's exchange rate, which some people say Beijing keeps purposefully cheap to boost exports.

"Exchange rates have to translate into economic realities and fundamentals, as was agreed at the G20 Summit in Seoul last year. Non-appropriate exchange rates contribute to internal imbalances as external ones," he said. "Moreover, the impact of one's exchange rate on the global system is bigger to the extent one's economy grows. The correction of imbalances can be gradual and has to be mutual of course."

"As major economies, China and the EU need to do their part to achieve the agreed objectives for strong, balanced and sustainable growth. Credible medium-term fiscal policy strategies will contribute to a reduction in deficit and debt. Appropriate exchange rates and a sharp focus on pushing forward structural reforms are also needed."

China has allowed the tightly controlled yuan to gain nearly 5 percent since it was depegged from the dollar in June 2010, and 1.3 percent since the start of the year.

Van Rompuy has used his visit to China and meetings with officials, including President Hu Jintao, to reassure Beijing about the safety of the euro currency amidst the ongoing debt crisis of some member states. [ID:nL4E7GH0EX]

But he also sought to push China on other issues, such as human rights and ensuring better access to the Chinese market for European companies.

"You may be aware there is a feeling in Europe that economic openness in China could further improve," Van Rompuy said, listing the opening up of public procurement and protection of intellectual property rights as core concerns.

"In the area of public procurement, the EU market is open to Chinese investments," Van Rompuy said. "Openness has to be mutual. That's why a level playing field for trade and investment is key.

"The reason is political. In modern societies, people will only accept the downsides of international competition if their own country has a fair chance to win abroad what it looses at home. If not, populism and protectionism loom. Public acceptance is the precondition for a beneficial opening."

(Writing by Ben Blanchard; Editing by Chris Lewis)