China likes to cover large distances in small steps. In August, it said that a few lucky foreign banks, including central banks, could invest some of the yuan they hold offshore in local Chinese bonds. The first to take up the offer was Malaysia's central bank, the Financial Times reported last week. With that purchase, another stone was removed in the great wall shielding China's currency from the outside world.
Global currencies emerge sporadically -- the dollar in the first half of the 20th century, the euro over the past decade. That China could even have a plausible claim to such a thing is a remarkable turnaround. Its monetary policy and its mints were often in such wretched shape before the 1949 revolution that old Mexican silver dollars still circulated. The very word "yuan" is a contraction of "yang yuan," or "foreign round coin."
After the Communist revolution the currency situation got even worse, with ration coupons playing a role in transactions. International deals went through the creaking hands of the Bank of China or, quietly, through black markets. It was only in 1994 that a unified, official exchange rate was established.
After solidifying the role of its currency in its domestic market, China resisted the next logical step. It kept a tight grip on the flow of capital across its borders. And even as its companies conquered world markets, they priced their goods in other people's money. The limits on conversion allow China's authorities to steer the economy and control business.
But this strategy has exposed China's companies to foreign-exchange risk, one reason why the authorities are reluctant to let the yuan move more freely against the dollar. It also has deprived China of the easy profits that come from buying foreign goods and assets in return for non-interest-bearing pieces of paper adorned with portraits of Chairman Mao.
Cliff of controls
Slowly, however, China seems to be changing its approach. As a result of reforms begun last year, exporters to China can now price their goods in yuan, rather than dollars, and deposit the proceeds in offshore corporate accounts, mostly in Hong Kong. At first the reforms were a flop, says one banker. Few accounts were opened and not much business done.
Offshore accounts offered puny rates of interest because banks could do so little with the money. But as deposits have grown, so has the number of firms seeking to tap them. In the past two months McDonald's has issued a yuan-based bond in Hong Kong, as has Hopewell, a property firm. Both were oversubscribed. Banks and the Chinese government itself also have gone to the well.
