In 2009, Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan started using on a trial basis the yuan as a settlement currency in cross-border trade with neighboring countries.

By February, China's renminbi-settled cross-border trade volume had grown to 11.6 billion yuan ($146.8 million).

China's central bank has signed currency swap agreements with the monetary authorities of the Republic of Korea (ROK), Malaysia, Indonesia, Belarus, Argentina, Iceland and the Hong Kong Special Administrative Region since December 2008, amounting to 653.5 billion yuan, or 24 percent of its 2.3992 trillion yuan foreign reserves.

At the 2009 finance ministers' meeting between the 10-member Association of Southeast Asian Nations (ASEAN) and China, Japan and the ROK, the three East Asian nations agreed to contribute $96 billion to a planned regional monetary fund, or 80 percent of the total $120 billion. Of that, China promised to contribute $38.4 billion, or 32 percent.

The deepening financial connections indicate that the establishment of a regional monetary alliance in East Asia is imminent.

Currently, Japan is the world's largest capital exporter and China is the largest trade exporter and foreign reserves holder.

The two countries' huge economic and financial strength, together with India's status as a leading service exporter in the world and the abundant labor in ASEAN nations as well as a broad market and yet-to-be-tapped primary resources in Central and Western Asian countries, have laid a solid foundation for closer economic trade within the Asian region itself.

For Asian nations, the establishment of a regional monetary system should take precedence over their efforts to push for global financial reforms.

To set up such a regional monetary system, China, Japan and the ROK must first try to forge a monetary alliance and set up a currency zone in Northeast Asia that is independent of the dollar.

The three neighbors should also try to set up a regional mechanism aimed at strengthening mutual exchange rate coordination and capital flow monitoring, as well as foreign reserves and international payment management.

As China's economic weight continues to rise, concrete measures should be taken to forge the yuan into Asia's leading currency via the regional currency alliance.

The yuan's internationalization is by no means an easy task. Towards this goal, China should gradually increase the yuan's share in international trade settlement, and strive to develop it into the chief investment currency in the international financial market, and finally, into a reserve currency.

The government should create more favorable external conditions for the internationalization of the yuan, such as taking steps to set up channels for the renminbi's overseas investment and financing, and gradually expand the scope of the yuan's pricing, settlement and circulation abroad.

The author is an economics researcher with the State Information Center

(China Daily 06/23/2010 page8)