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SCMP Reporter

Former central bank executive says unit should be an international reserve currency
Beijing should gear up preparations for the yuan's full convertibility, raising the profile of the currency amid the global financial turmoil, according to a former deputy governor of the central bank.
Wu Xiaoling, now a deputy director with the finance and economic committee of the National People's Congress, told a seminar in Beijing that the yuan should become an international reserve currency in tandem with its full convertibility.
Her remarks reflect a renewed interest in loosening control of the currency as the country deepens its involvement in the world financial system.
The mainland has leapfrogged Japan to become the largest holder of United States Treasury securities, holding  US$585 billion  compared with  Japan's US$573.2 billion, for the first time.
Ms Wu's comments were a fresh sign that the yuan's full convertibility  might be drawing near.
People's Bank of China governor Zhou Xiaochuan said in October last year that there was no timetable for the groundbreaking move.
'Convertibility is a must for a country that is already a major player in the global economy and markets,' said Huang Yiping, Citigroup's head of Asia-Pacific economic and market analysis. 'However, the latest financial crisis also implies that China should proceed with caution.'
Beijing  has a managed mechanism on foreign exchange, under which the yuan is partially convertible, since it is  yet to liberalise the capital account.
Economists said the remarks by Ms Wu, an outspoken central bank official during her tenure who retired from her post early this year, reflected  the mainland's mounting worries about the depreciation of its US$1.9 trillion foreign reserve. Almost half of its record-high foreign reserves are parked in US treasuries and government-backed corporate bonds but the subprime mortgage crisis has sparked fears of a weaker US dollar amid low interest rates.
Ms Wu said  it  was difficult to find an alternative reserve currency but added that the yuan was ready to become an international currency to replace the dollar.
'It's easy to say but difficult to do,' said Xu Mingqi, an economist with the Shanghai Academy of Social Sciences. 'China has to first develop the yuan into a major currency for settlements in international trade and encourage foreign investors to hold more yuan-denominated assets.'
China has been striving to wield its power in the financial world amid the deepening financial meltdown.
On Monday, Jin Liqun, the supervisory board chairman of the mainland's US$200 billion sovereign wealth fund, said Beijing  would demand a more significant role in the global financial system if it  was to inject additional capital into the International Monetary Fund.
A source close to the PBOC said the leadership was divided on the convertibility issue because some  officials believed the managed mechanism partly helped China to stave off the global financial crisis.
Ms Wu said China's foreign reserve and commercial banks held  US$370 billion in debt issued by struggling US mortgage giants Fannie Mae and Freddie Mac, and said  Beijing could afford the loss.
Mr Huang said convertibility would bring benefits for China such as giving it wider  access to international capital markets but it could also result in unstable capital flows.
There was another catch to a fully convertible yuan, analysts said.
China's exporters have already felt the pinch of dwindling overseas demand and a stronger yuan as manufacturers are going out of business and laying off thousands of workers.
Top dollar
The amount of US Treasury securities held by the mainland, in US$: $585b



Official calls for yuan convertibility