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AFX: Will world turn to yuan or gold?
The Chinese yuan could emerge as a global reserve currency if the dollar loses its shine in this round of financial crisis, which is going to reshape the global financial system in a dramatic way.

But if the yuan does not step out to meet this challenge and there is not enough faith in other currencies, will investors or countries go back to the gold standard?

Dr Olarn Chaipravat, the deputy prime minister, says so far the Chinese authorities have been cautious in proceeding with the full convertibility of the yuan or promoting its role in the international financial system although investors around the world are losing appetite for holding the US dollar.

He foresaw the yuan playing a more important role in the international financial system.

"Foreign investors still can't subscribe to yuan-denominated bonds directly. The rules remain cumbersome. And investors have to seek registration for permission to buy the bonds," he said. The US is facing a critical test in its handling of the financial crisis. Investors and governments are beginning to lose faith in the US financial system. So far the dollar has served as the world's reserve currency.

"The problem that we have not yet fully discussed is what the investors are going to do with the massive amount of dollars that the US has flooded out to the extent that we now have a euro-dollar market. If investors lose appetite for the dollar, what are they going to do with it?" said Dr Pongsak Hoontrakul, Senior Research Fellow at Sasin of Chulalongkorn University. If investors do not want to hold the dollar, what other choices do they have for reserve currencies? "If investors do not have confidence in any currencies, they might go back to gold like in the old days. But this is not likely to happen," said Olarn.

As Europe might also run into financial trouble, most eyes are turning to China and Japan. Apart from the euro, the yuan and the yen will become the twin currencies that will have a more important role in the post-dollar era.

"Japan, partly due to historical reasons, is reluctant to take up the international leadership role, while the Chinese authorities like to say that they are not ready yet. Traditionally, China and Japan have political problems but eventually they have to be able to work together," Olarn said.

Already, the Asean countries plus China, Japan and South Korea have been working together on building blocs to create a new regional financial architecture to help member countries avoid financial crisis.

Under the agreement, member countries will have three lines of defence, Dr Kanit Sangsubhan, director of the Fiscal Policy Research Institute, said. "First, they can use their own reserves to defend their currencies. Second, they can borrow from member countries through bilateral currency-swap agreements. For the third line of defence, they can borrow reserves from other sources," he said.