HONG KONG: Former Hong Kong Monetary Authority Chief Executive Joseph Yam said Friday that the yuan can become the "third pillar" of the global monetary system as deteriorating public finances erode confidence in the dollar and the euro.

"Large budget deficits and public debt, and structural problems in the financial system, mean that the two pillars are not resting on sound foundations," he said at a financial conference held in Beijing Friday. "There is a need for a third currency to serve as a third pillar, which would also give an opportunity for the two weak pillars to heal."

The nation is promoting greater use of the yuan overseas after Premier Wen Jiabao expressed concern in March that a weakening dollar was eroding the value of the nation's $2.3 trillion in foreign-exchange reserves. More yuan investment channels will help increase demand for use of the currency in international trade settlement, Wu Xiaoling, a former deputy governor of the People's Bank of China, said at the conference.

The mainland this year allowed 365 companies in Shanghai and the southern province of Guangdong to use yuan in cross-border trade with Hong Kong and members of the Association of Southeast Asian Nations from July 2. The government in October sold 6 billion yuan ($879 million) of bonds in Hong Kong to help elevate the "international status" of its currency.

"The biggest hurdle to making the yuan an international currency is the fact that it is still not fully convertible," said Tse Kwok Leung, head of the economic research division at Bank of China Ltd's Hong Kong branch. "How the financial authorities will carry out the reforms will determine when the yuan can become global."

The central bank said on November 11 that cross-border settlement using the currency exceeded 100 million yuan as of the end of September. Trade settled in yuan is "tiny" because foreign banks and companies do not have a proper way to invest any yuan they may receive from the settlements, Fan Yifei, executive vice president of China Construction Bank, the country's second-largest lender, said at Friday's conference.

"China should open its bond market to foreign central banks and financial institutions so they will want to accumulate yuan from exporters and importers, increasing the attractiveness of yuan for trade settlement," Wu said.

Yam forecast China's economy will in 20 years rival the US and Europe in terms of size and this will bolster the yuan's attraction as a reserve currency. Hong Kong is the "ideal testing ground" for China to promote yuan usage, he said.

Bloomberg News

(HK Edition 12/19/2009 page2)