Some industry insiders worry that foreign business partners may prefer to pay with foreign currency when buying products from Chinese if the yuan's value appreciates during the pilot program. And importers may want to pay only in yuan. As a result, there could be a large amount of yuan flowing out while the country's foreign exchange reserves increase.

However, Lian argues appreciation of yuan would encourage more overseas investors to invest with yuan. "This can result in the yuan to flow out of the country through the current account and flow back under the capital account." He said such a development would help build the yuan as an international currency.

Wang, of the Bank of China, said allowing yuan settlement could lead to bigger things in the future.

"If yuan settlement is further promoted, the next step would be to decide whether the domestic capital market needs to be opened," he said. "Say an overseas person holds a large quantity of yuan. Will he be allowed to buy and sell stocks and futures on the Chinese capital market?"

Global Path

As the pilot program edges the yuan toward international acceptance, a series of personnel and institutional steps can be expected. Caijing has learned that the central bank, from early on, decided to assign a deputy governor to oversee the process of yuan internationalization.

In addition, facing the possibility that more yuan will flow out of the country, monetary policymakers will have to pay careful attention and take necessary action. New positions in monetary policy will be necessary.

Caijing has learned from a source that the process of globalizing the yuan is being expedited by the central government, which is considering creating a department level agency, under the central bank, dedicated to cross-border trade yuan settlement and yuan internationalization. This new department would be mainly responsible for, but not limited to, drafting yuan exchange rate policy and execution, monitoring foreign currency supply and demand, as well as developing a yuan offshore market.

Creating a new department reflects concerns in Beijing that an international yuan would make macroeconomic adjustment more difficult to carry out.

A financial professional said when inflation rises and an economy overheats, adjustment methods can include increasing interest rates or tightening credit. If the yuan becomes an international currency, and is more easily exchanged overseas, more yuan capital would flow into the domestic capital markets. That's because the market would anticipate yuan appreciation, and the Chinese government would increase interest rates. This may result in loose credit, excess liquidity and inflation – results policymakers do not want.

"The current situation provides a great time for us to promote the yuan on the international market," said China International Investment Co. chief economist Ha Jiming. "Yuan trade settlement is just the beginning.

"Yuan unilateral trade settlements or currency swaps will make more countries acknowledge the yuan, and eventually it will be a change from quantity to quality."

1 yuan = 14 U.S. cents

Full article in Chinese: http://magazine.caijing.com.cn/2009-07-05/110193480.html