Shanghai Daily reports that the Yuan-settlement test to start.

(emphasis mine) [my comment]

Yuan-settlement test to start
Source: Xinhua 2009-1-7

CHINA'S central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.

The People's Bank of China will expand financial cooperation with overseas economies and "properly deal with the global financial crisis," the central bank said.

"We'll actively join international efforts to tackle the global financial crisis while safeguarding national interests," the central bank said.

It pledged to implement a pilot program that the State Council announced last month.

China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China's two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.

Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.

Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.

The dollar's exchange rate has become more volatile since the global financial crisis began.

The central bank said it will make the exchange rate of the yuan more flexible and keep it "basically stable on a reasonable, balanced level."

There has been speculation [This speculation (or "wishful thinking") is overwhelmingly from the American] that the yuan's appreciation will slow down, which would help Chinese exports maintain price advantages in overseas markets.

My reaction: Let emphasize again how important this development is. By allowing international trades to be settle in yuan, China is paving the way to drop its dollar peg. Consider:

• If China were to allow the yuan to strengthen today, its exporters would face enormous losses on their outstanding trade contracts. They will be shipping real goods to the US in exchange for worthless dollars. As a result, a wave of Chinese exporters would go under.
• If China allows the yuan to float AFTER exporters which to settling contracts in yuan, then it is American importers will face enormous losses on their outstanding trade contracts. They will need to pay for China's real goods with real money, and all they will have is worthless dollars. As a result, a wave of American retailers (especially Wal-Mart) will go under.