Last week, Cambodia’s tourism ministry has unveiled a policy to promote the use of Chinese yuan in the tourism sector. The Khmer Daily quoted Tith Chantha, a secretary of state at the ministry, as saying: “There will be no difficulty accepting Chinese yuan, it’s the same as accepting the dollar. Accepting renminbi could attract more Chinese tourists. It is also helpful for local enterprises, because they don’t need to exchange currency anymore.”

The ministry of tourism earlier released a white paper titled ‘China Ready for Cambodia Tourism’ outlining a five-year strategy for attracting Chinese tourists to the country with the aim of getting 2m of them to visit the country per year by 2020.

China is the second-largest source of tourists to the country after Vietnam, according to Cambodian tourism data. In the first four months of this year, Cambodia recorded about 275,000 Chinese tourist arrivals, up by 13.6pc compared to the same period last year.

Within five years, half of trade with China may be denominated in yuan

Will there be more countries following Cambodia’s footsteps?

According to China Tourism Research Institute, China had 120m outbound visitors in 2015 and they spent $104.5bn US, an increase by 12pc and 16.7pc, respectively, compared with 2014. And Cambodia was not among the top 10 destinations which were South Korea, Taiwan, Japan, Hong Kong, Thailand, France, Italy, Switzerland, Macau and Germany.

Cambodia’s plan also came at a time when the Chinese yuan will officially become an international foreign reserve currency on October 1. From that day on, Chinese yuan will be accepted worldwide and, according to the International Monetary Fund, China’s central bank promised that foreign exchange restrictions would be cleared then.

In short, more yuan notes would be available outside China, just like what we have witnessed with other four international reserve currencies — the US dollar, the euro, the Japanese yen and pound sterling.

The currency will then be more welcomed in any country, as it would be freely exchanged into any currencies and it can be counted as part of any countries’ international reserves.

Several countries including Thailand have for some time inked agreements for yuan-denominated transactions in trade.

At the IMF, works started last month on how yuan would stand in international reserves.

On July 20, the IMF Executive Board approved the methodology for determining currency amounts in the Special Drawing Right (SDR) basket to make it less complex and also to more closely align the weights of the five reserve currencies. In short, it gives the idea the amount of the five currencies central banks across the world should accumulate in their reserves.

In 1969, two years before the Bretton Woods fixed exchange rate system — where currencies were tied with gold — ended, the SDR was created by the IMF as a supplementary international reserve asset which comprises gold and international reserve currencies. At first, the dollar was the only reserve currency, but three more were added in line with the expansion of world trade and financial flows. And Chinese yuan will be part of it in October.

To facilitate central banks in adjusting their portfolios to the new basket, the IMF last month started to publish illustrative currency amounts in the lead up to the transition date.

The Chinese yuan will officially become an international foreign reserve currency on October 1

Assuming that transactions took place on July 25, one SDR was valued at $1.38. The weight of US dollar was 41.73pc; followed by the euro, 30.93pc; the Chinese yuan, 10.92pc; the Japanese yen, 8.33pc; and sterling 8.09pc.

The Chinese yuan’s weight is expected to increase quickly in line with the size of the Chinese economy. In 2013, China’s gross domestic product was valued at $9.24tn, compared with the United States’ $16.77tn. Given the recovery in the US economy, the dollar’s weight in SDR basket may be maintained despite yuan’s surge. But the impact on the euro, the Japanese yen and sterling seems imminent given the struggling economic stories of these territories.

A Thai banker is convinced that within five years, half of trade with China would be denominated in yuan. That is huge, given the 2015 trade value of $3.9tn.

In Thailand, it is estimated that around 90pc of annual exports, now about $210bn, is denominated in dollar. Exports to China account for about 12pc.

The banker’s conviction does not stem from natural demand for yuan transactions, but from historical lessons. China embraces a trader’s spirit: in nature, traders mercilessly squeeze all possible returns. Only when the counterparty’s blood is severely sucked would the traders relax the leash. In his metaphor, China will certainly force trade partners with whatever means to increase yuan-denominated transactions.

—The Nation/ANN

Published in Dawn, Business & Finance weekly, August 8th, 2016