DIPLOMACY

Asian Infrastructure Investment Bank

China seeks role for yuan in AIIB to extend currency’s global reach

Effort part of ongoing drive to extend the yuan’s international reach and challenge the greenback’s global dominance in finance

PUBLISHED : Tuesday, 14 April, 2015, 11:38pm
UPDATED : Monday, 27 April, 2015, 4:05pm

Beijing will push for the yuan to be included in a basket of currencies used to denominate and settle loans from the Chinese-led Asian Infrastructure Investment Bank (AIIB), according to think tank sources.

Beijing will also encourage the AIIB and the Silk Road Fund to set up special currency funds and issue yuan-denominated loans through both institutions, the sources said.

If the US dollar is used, it weakens China’s bid for the yuan to be a global currency
HAO HONG, BOCOM INTERNATIONAL

The efforts are part of a drive to internationalise the Chinese currency and come as the International Monetary Fund prepares to discuss the possible inclusion of the yuan as its fifth reserve currency and as part of the basket that forms the IMF's Special Drawing Rights.

The sources' claims appeared to be confirmed by a state media report, which said that a basket of currencies called the "AIIB currency" would most likely be adopted as the bank's currency of settlement.

In an article headlined "The five key questions facing the AIIB", the state-run Outlook magazine said yesterday that the biggest unanswered question about the bank was what currency - or currencies - would be used for settlement. The article said there were three options: the yuan, the US dollar or an AIIB currency basket.

It said that of the three the US dollar would be the most cost-efficient and convenient, and the yuan the most expensive and least convenient.

A currency basket was the most attractive option, it said, because it would be more resilient to market shocks.

Hao Hong, chief economist and managing director of research at Bocom International, said the AIIB's grand vision for infrastructure investment came with challenges but China should do its best to establish the yuan as a currency for settlement and denomination.

"If the US dollar is used instead, it weakens China's bid for the yuan to become a truly global currency and to challenge the hegemony of the US dollar," Hong said.

Yifan Hu, chief economist with Haitong Securities International, said it would be too hard to reach a consensus on an AIIB currency basket.

Hu said the Asian Development Bank had failed to set up its own currency basket despite years of negotiations.

"In my view, the US dollar will be used in the early stages of the AIIB, and then [the bank] will gradually move to a mix of the yuan and US dollar," Hu said.

The sources said China would push for broader use of the yuan at the AIIB and the Silk Road Fund, as part of efforts to promote the yuan as an international currency.

The US$40 billion Silk Road Fund is designed to invest in projects to boost infrastructure and businesses in countries from Asia to Europe.

The sources said that if founding members could not reach an initial consensus on a basket of currencies, Beijing would allow the AIIB and Silk Road Fund to use the US dollar as the currency of settlement.

But it would encourage the use of the yuan down the track as the organisation matured.

The sources said that there was still a long way to go in the internationalisation of the yuan and the greenback would continue to dominate the global financial system for the next few years.