Yuanimal spirits

Yuan: How many yuan does it cost to buy Google? Or Goldman Sachs? Chinese companies may soon be allowed to use the domestic currency to buy foreign assets and companies, according to a new pilot scheme announced by the People's Bank of China on January 13. There are plenty of restrictions, and a global rash of yuan-denominated deals is a distant prospect. But the move is an important step.

China's leaders want the yuan to become a global currency and have loosened several of their strict controls to prove it. First came rights for foreigners to hold deposits in yuan, and to use it to buy and sell goods. Some $10.3 billion of trade was yuan-settled in October. Yuan deposits in Hong Kong hit 280 billion yuan ($42 billion) in November. Both measures were tiny six months earlier.

Outbound investment is a sensible follow-up. China's outbound investments were negligible until around 2004, but by 2009 they had hit $56 billion. More animal spirits, and lighter, touch Chinese regulation, could see that figure improve rapidly. Meanwhile, if investment flows to companies and countries that already buy from the Middle Kingdom, money that flows out through M&A could flow back through trade.

Deals take two, and it's not clear which vendors will want to be paid in yuan. China's capital account remains effectively closed, so currency can't easily be taken back across the border. Some emerging market companies or governments may accept yuan, perhaps because they feel that favourable treatment from China depends on doing so.

Elsewhere, there's not much to be done with the currency besides putting it in low-yielding deposit accounts. Banks are working to address that by innovating more yuan-denominated investment products. But this will take time. The 20 billion of yuan bonds issued in November paled next to the 60 billion of new deposits in Hong Kong. Li Ka Shing's Cheung Kong group hopes to be the first Hong Kong company to undertake a stock issue in yuan. For most holders of the currency, though, the main appeal is a one-way bet on its appreciation. That's hardly the spirit in which internationalisation was intended.