The astounding rise of China's currency: Don Pittis

I sometimeswonder how the Communist revolutionary leader Mao Zedong, who warned against taking "the capitalist road," would feelabout his face on all those Chinese bills being traded around the world these days.

As of this week, therenminbiis being traded in a major way in Canada as well, after Finance Minister Joe Oliver opened NorthAmerica's firstChinese currencytrading hub Monday night in Toronto.

• Toronto becomes first North American renminbi trading hub
• Chinese yuan joins top 10most traded currencies

The currency has come a long way since the Chinese Communists began printing their own money in 1948 while the People's Liberation Army was still battling nationalist forces for control of the country.

Shortly after that, Chinaofficially named the currency therenminbi, using the characters for people and money. (As the BBC has explained, the currency is called therenminbi, while its unit is theyuan.)

Great leap

After more than 50 years as a completely controlled command-economy currency, the renminbi's great leap forward has only come in just the last few years.

"It's a time when you really can use the term 'dramatic,' " David Watt, chief economist at HSBC Canada, saysof the currency's move to prominence.

Before 2010, the vast majority of Chinese trade was still being conducted in U.S.dollars.

In other words, if you wanted to buy or sell to China, deals were made in U.S. dollars. Canadian buyers wouldrecalculatetheir payments into U.S. dollars, often having to convert their money twice on the way to the supplier in China.

But Watts says China'strade has gone through a transformationas increasingly deals are being conducted from beginning to end in its own currency.

"In 2010, Chinese trade that was settled in renminbiaccounted for 2.7 per cent of total trade," says Watt, quoting HSBC figures. "By 2014, it approached 30 per centand it's expected to reach 50 per cent by 2020."

Today HSBCreleaseda new survey on the internationalization of the Renminbi showing 17 per cent of businesses surveyed use the currency for settlement.

The other huge step forChina's money is the bond market.

Five years ago, McDonald's Corporation issued its first corporate bonds in renminbi, leading to the joke that RMB(the currency's shorthand), stood for Ronald McDonald Bonds.

Three years later,British Columbia became the first foreign government to sell RMBbonds, soon followed by the United Kingdom.

• British Columbia first government to issue Renminbi denominated bonds
• McDonald's issues bonds in Chinese currency

Already therenminbihas become the world's fifth most traded currency, beating the Canadian and Australian dollars in 2014.

Reserve status

But the final stage in a currency's assent to global prominenceis to become a reserve currency similar to the U.S. dollar, the pound sterling and the Swiss franc. Reserve currencies are those that other countries hold to back their own currencies. Watt says the Chinese yuanisn't far away.

"With some countries, it is already becoming a reserve currency," says Watt. "Some countries are already holding some renminbi as part of their foreign exchange reserves."

The International Monetary Fund has not yet included yuanin its official basket of currencies. Watt says that's coming.

While China may want the prestige and economic advantage of having a widely traded currency, there are disadvantages, too. Already there are signs the country's central bank can no longer keep as firm a grip on its own money.

For years, governments like the United States complained that the Chinese government was holding its currency artificially low, giving it an unfair trade advantage.

Holding a country's currency down is relatively easybecause it involves selling billions of dollars worth of your own money into currency markets. China's central bank usesrenminbi to buyU.S. dollars and euros and yen and keeps them in itsburgeoning reserves.

Eroding confidence

But last week, there were signs the secretive People's Bank of China is doing the exact opposite.

The Financial Times reported that the Chinese central bank was desperately drawing down its $3.8 trillion in reserves to sell dollars and buy yuan after global traders began selling off the currency.

The FT said Chinese authorities "sought to prevent recent currency weakness from eroding confidence in the economy and inciting capital flight."

As many other countries have found,includingBritain in 1992when traders outbidthe Bank of England and sent the pound tumbling that's the problem with havinga lot of your currency in circulation in the world. You are no longer the only ones trading it.