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Why the Yuan's Reach Is Widening

Frederic J. Brown | AFP | Getty Images

Don't look now, but China may have bigger plans for the yuan than you thought.

A year ago, the country was in the midst of establishing currency swap agreements with trading partners, including South Korea. Various currency experts saw the moves as part of a plan to make the yuan more of an international currency - but the lines got little use.

Well, that was then. China and South Korea have now announced that they will activate their swap line, worth about $59 billion. The move "suggests a new and more substantive evolution" toward internationalizing the two countries' currencies, says Marc Chandler, chief currency strategist at Brown Brothers Harriman.

Chandler points out that full use of the swap line would dramatically increase international use of the South Korean won, and have an even more pronounced effect on the yuan. " Bilateral trade was about $220 billion last year, but only 3% was settled in the yuan or won, with the latter having a greater share," he wrote in a note to clients.

The bottom line: don't expect the yuan to challenge the dollar as the top currency dog anytime soon, but this is a development to watch.

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