Preparing for emergence of Chinese yuan: The Nation columnist

A customer counts Chinese Yuan banknotes as she purchases vegetables at a market in Beijing, China, May 9.
A customer counts Chinese Yuan banknotes as she purchases vegetables at a market in Beijing, China, May 9. PHOTO: REUTERS

Achara Deboonme

The Nation/Asia News Network

Last week, Cambodia's Tourism Ministry unveiled a policy to promote the use of the Chinese yuan in the tourism sector.

The Khmer Daily quoted Tith Chantha, a secretary of state at the ministry, as saying: "There will be no difficulty in accepting Chinese yuan, it's the same as accepting the US dollar. Accepting renminbi could attract more Chinese tourists. It is also helpful for local enterprises, because they don't need to exchange currency anymore."

The Ministry of Tourism earlier released a white paper titled "China Ready for Cambodia Tourism" outlining a five-year strategy for attracting Chinese tourists to the country with the aim of getting two million of them to visit the country per year by 2020.

China is the second-largest source of tourists to the country after Vietnam, according to Cambodian tourism data. In the first four months of this year, Cambodia recorded about 275,000 Chinese tourist arrivals, up by 13.6 per cent compared to the same period last year.

Will there be more countries following Cambodia's footsteps?

According to China Tourism Research Institute, China had 120 million outbound visitors in 2015 and they spent US$104.5 billion (S$140.25 billion), a 12-per cent increase, and 16.7 per cent when compared with 2014. And Cambodia was not among the top 10 destinations, which were: South Korea, Taiwan, Japan, Hong Kong, Thailand, France, Italy, Switzerland, Macau and Germany.

Cambodia unveiled the plan shortly after a crucial Asean meeting, where the country was criticised for its support to China at the expense of Asean members over the South China Sea issue.

It also comes at a time when the Chinese yuan will officially become an international foreign reserve currency beginning October 1, when it will be accepted worldwide.

According to the International Monetary Fund (IMF), China's central bank has promised that foreign exchange restrictions would be cleared then. In short, more yuan notes would be available outside China, just like the four other international reserve currencies - the US dollar, the euro, the Japanese yen and pound sterling.

The yuan will be welcomed in any country, as it can be freely exchanged into any currencies and it can be counted as part of a country's international reserves.

Several countries, including Thailand, have for some time inked agreements for yuan-denominated transactions in trade. Cambodia's move might inspire more countries to promote the yuan in the tourism sector.

At the IMF, work started last month on how the yuan would stand in international reserves.

On July 20, the IMF executive board approved the methodology for determining currency amounts in the Special Drawing Rights (SDR) basket to make it less complex and also to more closely align the weights of the five reserve currencies.

In short, it gives an idea of the amounts of the five currencies central banks across the world should accumulate in their reserves.

In 1969, two years before the Bretton Woods fixed exchange rate system - where currencies were tied with gold - ended, the SDR was created by the IMF as a supplementary international reserve asset, comprising gold and international reserve currencies.

At first, the US dollar was the only reserve currency, but three more were added in line with the expansion of world trade and financial flows.

To facilitate central banks in adjusting their portfolios to the new basket, the IMF last month started to publish illustrative currency amounts in the lead up to the transition date.

Assuming that transactions took place on July 25, one SDR was valued at US$1.38. The weight of the US dollar was 41.73 per cent; followed by the euro 30.93 per cent; the Chinese yuan 10.92 per cent; the Japanese yen 8.33 per cent; and sterling 8.09 per cent.

The Chinese yuan's weight is expected to increase quickly in line with the size of the Chinese economy. In 2013, China's gross domestic product was valued at US$9.24 trillion, compared with the United States' US$16.77 trillion.

Given the recovery in the US economy, the dollar's weight in the SDR basket may be maintained despite the yuan's surge. But the impact on the euro, the Japanese yen and sterling seems imminent given the struggling economic stories of these territories.

A Thai banker is convinced that within five years, half of trade with China would be denominated in yuan. That is huge, given the 2015 trade value of US$3.9 trillion.

In Thailand, it is estimated that around 90 per cent of annual exports, now about US$210 billion, is denominated in US dollar. Exports to China account for about 12 per cent.

The banker's conviction does not stem from natural demand for yuan transactions, but from historical lessons. China embraces a trader's spirit: in nature, traders mercilessly squeeze all possible returns. Only when the counterparty's blood is severely sucked would the traders relax the leash. In his metaphor, China will certainly force trade partners with whatever means to increase yuan-denominated transactions.

That should not be a problem if the terms offer mutual benefits. In time, China will learn that despite its bigger size, politically and economically, it still needs friends in this world.

Cambodia's latest move on yuan seems to be a good thing for the nation, which has seen a high degree of dollarisation after the civil war. But China may need to learn that sometimes it should better let nature run its course as each nation has its own context.