A senior central bank official called on Saturday for reducing reliance on international reserve currencies in trade settlements, citing risks posed by their instability.

"We should enhance cooperation and reduce dependence on international reserve currencies," Jin Zhongxia, deputy director-general of the international department at the People's Bank of China, said at a forum attended by Portuguese-speaking officials and business people. "The existing international monetary system, centered on a small number of reserve currencies, is quite unstable," he told participants at the third Forum for Economic and Trade Cooperation between China and Portuguese-speaking Countries, which concluded on Sunday.

The US dollar has weakened over the past three months against all 16 major market currencies, according to a Bloomberg report.

The Federal Reserve has gone a step further and announced plans to buy $600 billion of government bonds to reduce borrowing costs and boost domestic growth. It is expected to further drive down the value of the dollar.

Excessive printing of reserve currencies will cause capital flows to soar in emerging economies, causing problems ranging from asset bubbles to rising inflation, Jin said.

"It (over-printing of reserve currencies) places emerging economies in a dilemma," he said. If they peg their currencies to reserve currencies, they will face the challenges of increasing capital influx, capital market bubbles and inflationary pressure. If they let their currencies float freely, they will encounter the serious risks posed by fluctuations in exchange rates, rising trade costs and variable economic conditions, Jin said.

"Using the local currency (yuan) in trade settlement could be a feasible option," he said.

China plans to boost yuan-denominated cross-border trade with other countries 10-fold to 20 percent of total trade, or more than 2.5 trillion yuan (US$377.6 billion), Jin said, without specifying a target date.

In 2009, China selected five cities for renminbi cross-border trade settlements on a trial basis. The practice has now expanded to 20 provinces and municipalities.

By the end of September, such settlements amounted to 197.1 billion yuan between Chinese enterprises and those from 43 economies.

Renminbi cross-border trade settlements effectively reduce the risks posed by exchange rate fluctuations to China's trade partners, Jin said, adding that there is room for the practice to be expanded to Portuguese-speaking nations.

(China Daily November 15, 2010)