Trial begins for trade settlements with yuan

While discussions on the US dollar's status in a weakened world economy heated up last week, China began its long-awaited initiative to trade with yuan as a step toward reducing China's reliance on the dollar.

On July 6, three Shanghai companies became the first to conduct cross-border trades with yuan.

Their actions followed the government's announcement of new rules allowing selected companies in Shanghai and in four cities in Guangdong province to use yuan to settle international trade accounts on a trial basis.

According to these rules, the companies can use yuan, instead of the dollars currently used, to settle trade accounts with merchants in Hong Kong and Southeast Asian countries.

Since major settlement currencies such as the dollar and euro have fluctuated wildly in the wake of global financial turmoil, officials said trading with yuan would help reduce the risk of continuing exchange rate fluctuations.

Su Ning, vice governor of the central bank, said on July 6 that the program would increase the liquidity of the yuan outside of China and help promote the stability of China's exports.

In the long run, experts said the move marked an important strategic step to promote broader use of renminbi internationally and gradually reduce reliance on the dollar.

"Chinese currency should become a major means of trade settlement before it rises to a major currency in the world, and the nation is now working in that direction via the pilot project," Ding Zhijie, vice dean of finance at the University of International Business and Economics, told China Business Weekly.

"It is also necessary for China to rectify the lopsided nature of the nation's status as an export powerhouse with an obscure currency," Ding said.

Given China's determination to reduce its reliance on the dollar, Ding said the renminbi could go global in the next two to three years.

China has voiced concerns about the dollar's supremacy in the global financial system in recent months and called for the diversification of international currency reserves.

With the US Federal Reserve printing money to help finance its economic stimulus, China was worried that the move might stoke inflation worldwide and reduce the value of dollars held by China.

Zhou Xiachuan, governor of the People's Bank of China, in April proposed creating a super sovereign reserve currency based on the International Monetary Fund's special drawing rights to replace the US dollar.

China earlier had signed currency swap deals with six countries, in part to boost the amount of renminbi being held overseas and pave the way for settling international trade in yuan.

"It is the right time to promote the use of yuan in international settlement. The value of Chinese currency has been stable, and the Chinese economy has outperformed the rest of the world in the wake of the financial crisis," Lian Ping, chief economist with the Bank of Communications, said.

"The move could be a boon to major Chinese firms in the selected cities, allowing them to avoid foreign exchange risks," Lian said.

However, whether the pilot program succeeds will depend on the agreement of China's foreign trade counterparts to use yuan in trade settlements, he said.

Experts agreed that the scale of yuan cross-border trade settlements would be limited at the initial stage, because only foreign companies in an inferior trading position with their Chinese counterparts are willing to be paid in yuan.

"The country's import bills are more likely to be settled in yuan than exports, since importers usually have a bigger say in negotiating with their trade partners," Lian said.

Yuwa Hedrick-Wong, an economic advisor to MasterCard Worldwide in the company's Asia Pacific divisions, said another barrier is the limited amount of renminbi in the overseas market.

Moreover, there are no channels for foreign yuan holders to hedge currency risks, since they are not allowed to invest in domestic capital markets and the yuan is not fully convertible, Hedrick-Wong said.

At this stage in the pilot project, the goal is to promote wider use of yuan in trade rather than investments, which are subject to fewer regulations.

"Regulators can control the volume of trade settlements, and the qualifications of the firms that are allowed to participate in the trial program are under strict regulations," Lian said.

"Thus, the risks of cross-border trade transactions using yuan are very limited," he said.

(China Daily 07/13/2009 page4)