China urged to make yuan international

China should speed up reforming its financial system to make the yuan an international currency, said political advisors Saturday.

"A significant inspiration to draw from the global financial crisis is that we must play an active role in the reconstruction of the international financial order," said Peter Kwong Ching Woo, chairman of the Hong Kong-based Wharf (Holdings) Ltd.

The key to financial reform is to make the yuan an international currency, said Woo in a speech to the Second Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory body.

That means using the Chinese currency to settle international trade payments, allowing the yuan freely convertible on the capital account and making it an international reserve currency, he said.

China's yuan, or Renminbi, can be freely convertible on the current account but not on the capital account, preventing it from being a reserve currency or a choice in international trade settlement.

China has announced trial programs to settle trade in the yuan, a move analysts say will facilitate foreign trade as Chinese exporters might face losses if they continue to be paid in the US dollar. The dollar's exchange rate has become more volatile since the global financial crisis.

Economists say the move will increase the acceptance of the currency in Asia, which will help it become an international currency in the long run.

The status of the yuan as an international currency will benefit China by giving it a bigger say in world financial issues and reducing the reliance of its huge foreign reserves on the US dollar, some analysts say.

Other analysts argue a fully convertible yuan will hurt China as it would allow massive capital outflow during a financial crisis.

Meanwhile, Chinese authorities remain cautious.

It's possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there's no need to push for that, Yi Gang, vice central bank governor, told Xinhua earlier this month.

That process should be conducive to all sides, he said.

Xu Shanda, former vice director of the State Administration of Taxation and a CPPCC National Committee member, urged for faster paces in making the yuan an international currency as a way of increasing national wealth.

He said the United States and the European Union have obtained hefty royalties from the international use of their currencies while China has become the biggest source of that income.

A royalty, or seigniorage, results from the difference between the cost of printing currency and the face value of the money.

"China's loss due to royalty payment has far exceeded the benefit of not making the yuan an international currency," he said in a speech to the annual session of the CPPCC National Committee, without elaborating.

China's State Council, or Cabinet, said last December it would allow the yuan to be used for settlement between the country's two economic powerhouses -- Guangdong Province and the Yangtze River Delta -- and the special administrative regions of Hong Kong and Macao.

Meanwhile, exporters in Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.

What Is Seigniorage?

Where is all the U.S. currency?

In it we mention that the U.S. government profits from the fact that people all over the world love our green pieces of paper.

How does the government actually profit? Through something called seigniorage, which is as hard to explain as it is to spell.

In the old days, seigniorage was the revenue the government earned because it costs less than a dollar to print a dollar. Say it costs 2 cents to print a $1 dollar bill. Then, poof, the government has gained something like 98 cents when it prints that dollar and uses it to buy something. That's overly simple but it's a good starting place.

Today the Federal Reserve controls the money supply. And one of the ways it does this is by buying or selling treasury bills. If the Fed wants to increase the money supply, it buys some treasury bills (government bonds) from banks. So a treasury bill is taken out of circulation and replaced, basically, with dollars. Presto. More dollars in the world.

Here's the key part: more dollars in circulation means more treasury bills at the Fed. And unlike dollars, the treasury bills earn interest. So the Fed profits. It's holding onto those treasury bills, which pay off with interest. Basically, when you hold onto U.S. cash, you're giving the Federal Reserve an interest-free loan.

Check out the wikipedia entry.

And here's a good explainer on what it's like to be the institution that can basically create money out of thin air.