Yuan starts on long slog to reserve currency status

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - It's time for markets to take a deep breath: the yuan will not become a reserve currency, let alone dethrone the dollar, this year, next year or any time soon.

Will China's currency be increasingly used to settle trade in Asia and, who knows, maybe even to denominate commodities? Yes.

Does China worry that lax U.S. monetary and fiscal policy will debase the dollar, today's dominant global currency, and with it a chunk of its $1.95 trillion (1.2 trillion pounds) stockpile of reserves? Yes.

Does China want to enhance the legitimacy of the International Monetary Fund -- and gain more clout in the process -- by adding the yuan to the basket of currencies that make up the Special Drawing Right, the fund's virtual currency? Yes.

Expect to hear more on these subjects at this week's Group of Eight summit in Italy, which President Hu Jintao will attend.

But conflating these considerations into the conclusion that China is ready, economically or politically, to do what is needed to turn the yuan, also known as the renminbi (RMB), into a reserve currency is wide off the mark.

"The renminbi will clearly internationalise significantly over the next 5-10 years. Over a longer period (10-20 years) it may emerge as a secondary reserve currency like the Japanese yen, although this is not certain.

"For it to replace the dollar as the main global reserve currency would require many decades and a combination of improbable events," wrote Arthur Kroeber in the China Economic Quarterly, a journal he edits.