A free-floating Chinese yuan would surpass sterling and the Swiss franc in the league of major currencies and its status would elevate Asia as a foreign exchange trading region, industry experts say.
Like the Japanese yen 40 years ago, the yuan is expected to emerge over the next decade as one of the world's most traded currencies, taking its place alongside the yen and behind the dollar and euro. It is currently pegged at 8.28 to the dollar but China, taking steps to relax currency controls gradually, says flotation is the ultimate goal.
"With the currency floating, together with continued relatively fast growth, the relative importance of the yuan across all major currencies is going to rise. Surpassing sterling and the Swiss franc won't be difficult to achieve," said Shang-Jin Wei, research adviser at the International Monetary Fund in Washington.
"The yuan could be like the yen in the league of international currencies, if China wanted it to be. In many ways Japan and China are similar - Japan has been a part of an explicit model China wants to follow."
China is already the world's sixth biggest economy and the International Monetary Fund projects its share of world output will more than double from 2002 levels by 2020 if its current pace of reform and employment growth is sustained.
"Ultimately China's banking system will improve and foreign banks will become more active there. When that happens there will be much larger market and financial integration therefore a much larger currency market as well," said Ira Kalish, global director at Deloitte Research.
Beijing has pledged to make the yuan fully convertible in five to six years. Presently convertibility is limited to corporates and tourists for goods and services.
The yen began floating in the 1970s but restrictions on trading remained until the 1980s.
Unlike European and US authorities, Japan often intervenes in the currency markets to influence the yen rate. Industry specialists expect China to emulate Japan.
"They don't have a need to see the yuan becoming an internationally prominent currency. A stable currency serves the purpose for the domestic economy and this is going to be their prime objective," said Clifford Cheah, head of foreign exchange for Asia at Deutsche Bank in Singapore.
The dollar is by far the most traded currency, with the euro trailing a distant second and the yen even further behind. Average daily transactions involving the dollar total over $1.0 trillion whereas the yen is around $266 billion and, at the last count in 2001 the yuan sees just $95 million.
Trading in euro/dollar accounts for 30 percent of the market while trading in the dollar against the yen is 20 percent.
Overseas investors and corporates use a synthetic market, known as non-deliverable forwards, to hedge exposure to China and volumes in this market reached $300 million this year.
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