Chinese yuan seen as 'next dollar' in 3 to 5 yrs

By Michelle Orosa, ABS-CBN News

Posted at Feb 03 2010 06:15 PM | Updated as of Feb 04 2010 05:51 AM

MANILA, Philippines - Analysts are convinced that the Chinese renminbi or Chinese yuan (CNY) may join the likes of the US dollar, euro and yen in the coming years as a major international currency, with signs of strength already being seen through increased trade in the Philippine capital markets.

BDO Capital Investments President Ed Francisco said that with the Philippines' growing trade links with China, it may only be a few years before the renminbi becomes a competitive currency in the foreign exchange market.

"China's still the story, specially for multinationals and big corporations. If you want to get a bang for your buck, that's where you invest. It may only take 3 to 5 years before it is included in the major basket of currencies," he said.

Data released by the central bank in January showed that the renminbi transactions of Philippine banks have been growing rapidly, with settlement bank for renminbi banknotes trading in the Philippines jumping from just CNY500,000 as of December 31, 2008 to CNY174.6 million as of December 31, 2009.   

Citiseconline's Chief Technical Analyst Juanis Barredo added that part of the reason more banks are investing in the currency is their need to hedge positions against the dollar, as the US economy continues to reel from effects of the global financial crisis.

"It's a diversification strategy. Investors are strengthening their positions in other currencies. Even China itself is de-leveraging its dollar exposure," he explained.

But Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo pointed out the renminbi has a long way to go before it can be considered part of the major basket of currencies being traded worldwide, due to its inability to meet four criteria: ease in liquidity and conversion, wide usage, depth of domestic capital market, and macrostability of the issuing country.

Guinigundo noted that the dollar remains the dominant foreign currency traded in the country, especially since, of the Philippines' total foreign direct and portfolio investments, US accounts for 70% to 90% against China, which only accounts for barely a tenth of a percent.

"One of the reasons that the dollar, the euro and the yen are dominant is because if you take them to Wall Street, or to any other country, they can easily be used.  How internationalized are the financial markets of China? They have to do this first before they can be considered a major currency worldwide," Guinigundo said.

The Monetary Board approved the inclusion of renminbi in the list of currencies convertible with the BSP as early as 3 years ago to accommodate a growing demand for easier conversion of the currency. Prior to the approval, transactions had to be coursed through the BSP and the Philippine branch of the People's Bank of China.