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The fast-growing economy in China is quietly bolstering the popularity of its currency, the renminbi, in neighboring countries, making it virtually fully convertible in some regions.
Should the central government, deeply concerned that rushed reforms may disrupt financial security, step in to control the situation?
Economists' suggestion is just to keep an eye on it and let it brew.
The Chinese currency is being increasingly accepted as a hard currency by Singapore, Viet Nam, Russia and Malaysia. The yuan is only convertible on the current account and not fully convertible on the capital account.
China's robust economic growth and exports, withstanding the initial impact of its World Trade Organization membership, are instead exerting upward pressure on the renminbi.
"The renminbi has basically become something like a hard currency that's only second to the US dollar in some neighbouring nations," said Qin Chijiang, deputy secretary-general of the China Society of Finance (CSF).
"I bought a fairly nice T-shirt in Malaysia for 20 yuan (US$2.40) in September when I was travelling," said Zhang Lao, a 27-year-old Beijing resident. "That was pretty cheap."
Most of the renminbi banknotes outside China, analysts say, are flowing around in regions near its border, facilitating small trade in commodities like clothes, liquor, cigarettes and foodstuffs with residents of neighbouring countries.
Among other currencies, renminbi is now widely circulating in northern Viet Nam and more than 90 percent of border trade deals between the two countries are settled in the Chinese currency, according to the State Administration of Foreign Exchange (SAFE).
A growing circulation of renminbi outside the country has, partly at least, brought prosperity to unauthorized money changers on Viet Nam's side of the border.
Such money changers, dubbed "ditan banks" or "stand banks" in Chinese, typically have a Vietnamese woman sitting on a mat behind a big iron box, in which bunches of bills in both the Vietnamese dong and renminbi are neatly placed.
"It's said there are as many as 500 'ditan banks' in Viet Nam. They not only serve as money changers, but are also engaged in foreign currency trading, and they even do settlement," Ma Delun, deputy director of SAFE, wrote in an article earlier this year.
"That renminbi is being increasingly used as a settlement currency in border trade reflects its reputation and the recognition of its strength," said Zhao Jinping, a senior researcher with the State Council's think-tank, the Development Research Centre (DRC).
"It's in the direction of renminbi's internationalization and renminbi becoming a mature currency," he added.
The Chinese Government, under pressure from the International Monetary Fund (IMF) to quicken reform, still has no timetable for the currency's full convertibility.
The issue naturally has drawn attention from China's financial authorities. The SAFE has recently completed reports on the macroeconomic implications of renminbi's outflow and its increasing role in border trade settlement.
A survey by the SAFE bureau in Northeast China's border province of Heilongjiang estimated the outstanding amount of renminbi banknotes in neighbouring Russia are at 99.5 million yuan (US$11.9 million).
That includes 77 million yuan (US$9.3 million) held by Chinese border traders travelling in Russia, 6 million yuan (US$720,000) at an estimated 100 renminbi-capable money changers in Russia, and another 6 million yuan in the hands of Chinese tourists and trade officials as well as some held by Russian residents.
"As for renminbi's circulation and use in border regions of Russia, the benefits outweigh the disadvantages," said Chen Xuebin, an official with the SAFE's Heilongjiang bureau.
The judgement largely reflects that of many other officials and economists.
Chen said using renminbi for border trade payments reduces China's foreign exchange spending and facilitates trade, but may complicate China's money supply policies as part of the cash is flowing outside the system.
Yet many questions remain unanswered.
SAFE's Ma Delun asked in his article:"What currency should the banks on both sides choose for settlement? How do we prevent exchange rate risks? Should the renminbi bills beyond the border be diverted back?"
"To all these questions, we couldn't find the answer during this inspection," he said, referring to his trip earlier this year to China's southern regions.
But the yuan's growing role in trade settlement has already prompted reaction from the Chinese authorities.
At the end of September, the government issued a circular urging Chinese commercial banks to forge correspondent bank ties with their counterparts in the neighbouring Commonwealth of Independent States members to lubricate border trade settlement.
Meanwhile, commercial banks in six border provinces and autonomous regions were also allowed to provide the yuan's exchange rates against the currencies of their neighbouring countries.
The moves, the authorities said, were aimed at providing convenient foreign exchange services to "gradually replace 'stand banks'."
But banks have not been as decisive, weighing the exchange rate risks of holding more unstable foreign currencies and the costs of declaring war on illegitimate money changers. Some say 90 per cent of the border trade in many regions is settled at stand banks.
"We definitely don't like 'ditan banks' as they are competitors," Nie Changwen, foreign exchange division chief at the Industrial and Commercial Bank of China (ICBC), said in an interview. "But the volume is not all that big and commercial banks have to consider the issue of costs."
Only a meagre 4 per cent to 5 per cent of ICBC's foreign exchange business currently comes from border trade, she said.
While the authorities' moves presumably will result in a shrinkage in renminbi's circulation in neighbouring nations, CSF's Qin said he believed the intention was not to herd the mavericking cash back home but to protect Chinese traders from exchange rate volatility in the rouble.
The Chinese economy can easily deliver enough commodities to absorb the purchasing power of that renminbi cash, which is still a tiny amount compared to the overall economy, Qin said. Border trade remains a small part of China's total foreign trade.
"There is no need to recall that cash," he said.
Qin, formerly head of the central bank's research bureau, dismissed concerns that China may face the pressure of retracting the cross-border renminbi banknotes once its neighbours invoke IMF terms on convertibility obligations.
"It (the renminbi in circulation in bordering countries) is spontaneous civil behavior and has been there for 20 years already. It's not an governmental act and there is no reason for that request," he said.
The settlement role of yuan in border trade is helpful in realizing its full convertibility, but the use of renminbi is still largely limited to capital cities and tourist destinations in Southeast Asia, Qin noted.
"If in another 10 years, renminbi is also accepted in Europe and America, then we may consider announcing its full convertibility," he said. "But currently we can just leave it to itself."
Although the maverick renminbi cash is still tiny given the trillions in China's broad money supply, the DRC's Zhao said precautions are necessary:"With the volume growing, we should consider its implications on the monetary policy."
(China Daily November 4, 2002)
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