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Yen, yuan and U.S. dollar notes.

TRUTH LEEM

For a symbol of China's economic might -- and its monetary policy challenges -- you need to look no further than the gleaming towers of Oriental Plaza.



A short walk from Beijing's iconic Forbidden City and Tiananmen Square, this posh shopping mall and business complex is home to a five-star hotel, dozens of high-end shops, eight office towers housing foreign firms including Deloitte and a high profile graduate school of business -- in other words, some of the most modern aspects of the Chinese economy, and a source of national pride.



It is also the central asset behind the first-ever yuan-denominated IPO in Hong Kong this month, that of the Hui Xian Real Estate Investment Trust controlled by billionaire real estate tycoon Li Ka-shing.

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This much-hyped IPO, cited as China encouraging the use of its currency in international trade, has drawn a lukewarm response, likely reflecting the risk of investing in the currency of a country which keeps its capital accounts under tight control.



Still, further yuan-denominated stock listings are expected in Hong Kong, which is emerging as the major trade hub in China's long march to build the yuan as a global alternative to the U.S. dollar.



China now allows some trade accounts to be settled directly in yuan rather than converting through another currency. Just 7 per cent of China's foreign trade in this year's first quarter was conducted in yuan, according to data released this week. But that is an increase of 0.5 per cent year on year, and part of a trend which economists are watching carefully. Greater demand globally for the yuan could drive down demand for the dollar, raising U.S. interest rates.



"There are several different things at work. One, it's good press. They like to do things that raise the international profile of their currency and signal to people they're not as reliant on the U.S. dollar," said Andrew Batson, head of research for GaveKal-Dragonomics in Beijing. Settling more exports in Chinese currency also means China's massive foreign exchange reserve does not grow as quickly, significant in a country where the reserves hit $3-trillion in March.



The Chinese government has been raising interest rates and bank reserve requirement ratios in a bid to control inflation, but even this may not be enough, the People's Bank of China warned this week, fuelling speculation of more dramatic action.



"Foreign-exchange reserves have exceeded the reasonable levels that we actually need," bank governor Zhou Xiaochuan warned this week. "If the government doesn't strike the right balance with its policies, the build-up could cause big risks."



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