Yuan can become reserve currency: ADB

“The internationalization of the renminbi has the potential to become an alternative to the US dollar — as did the euro — and help nudge the global reserve system toward a multi-currency reserve structure,” it said.

The study,undertaken by 11 economists from around the world,including academics Joseph Stiglitz and Barry Eichengren,did not provide a timeline for when the yuan could become a reserve currency.

Most analysts expect it to be fully convertible by 2020,the target date set by Beijing to make Shanghai an international financial center.

Global financial markets have focused intensely this week on the yuan,or renminbi as it is also called,after China’s central bank pledged at the weekend to increase currency flexibility after pegging the yuan to the US dollar for nearly two years.

The yuan has moved in a wider range in the spot market since then,though it has only appreciated about 0.2 per cent against the dollar.

The ADB study,entitled “The Future Global Reserve System — An Asian Perspective,” recommended having Asia’s vast currency reserves play a more important role in stabilizing the global financial system,through swap lines,the International Monetary Fund’s Special Drawing Rights (SDRs) and other borrowing.

The global financial crisis,which originated in the US housing market,has sparked a growing discussion among policy makers and academics that the world should no longer rely on a single,dominant currency,such as the dollar,as it has done since the end of the gold standard.

The ADB study also endorsed the use of capital controls as a tool to strengthen management of an economy,with the caveat that they are temporary and coordinated.

“These controls on the flow of capital tend to be more effective when done on a coordinated basis across countries that are targets of rapid capital movements,rather than individual countries reacting unilaterally,” the report said.

Taiwan implemented capital controls in November 2009,and Indonesia took steps to manage capital inflows last week. South Korea is planning to tighten currency derivative trading caps for foreign banks.

The study also said a common Asian currency is not a realistic goal,and regional monetary coordination should stop short of pegging currencies in the region.

Since 2000,global foreign exchange reserves have grown by a staggering $6.15 trillion and stood at $8.09 trillion at the end of 2009,or 14 per cent of the world’s gross domestic product,International Monetary Fund figures showed.

China and Japan together hold about 43 per cent of global reserves.