Holding currency

By Ou Lu (China Daily)
Updated: 2009-09-10 08:38

China's trial to allow exporters in a small number of cities to settle their overseas trade in yuan rather than in the US dollar, seen as a major step toward eventually internationalizing the Chinese currency, has recently run into a roadblock as foreign buyers either have little access to or little faith in the Chinese currency.

The trial allowing exporters in a few cities to settle their overseas trade in the yuan recently hit a snag as foreign buyers either have little access to or little faith in the Chinese currency. [China daily]

But many say this temporary setback cannot hold back China's ambitions to raise the role of the yuan in international trade and finance, as well as reduce reliance on the US dollar - no matter how long it takes.

To that effect, Vice-Premier Wang Qishan has been put in charge of a task force to make the yuan a currency for international trade, an experiment in which Hong Kong is expected to play a crucial role, the Hong Kong-based South China Morning Post quoted Yi Xianrong, a financial expert with the Chinese Academy of Social Sciences, as saying.

The vice-governor of the People's Bank of China (PBOC), Hu Xiaolian, has been appointed the task force's research team, Yi said.

"The leadership had decided the time had come to establish a task force and research teams over the issue, though it might take time for it to be realized," he said.

Many economists have echoed that view. They believe the financial crisis and continuing depreciation of the US dollar have provided the Chinese yuan a good opportunity to function as an international currency.

Yi added that the program will also include measures to help Hong Kong develop as an offshore center for the yuan, something that is said to be desired by both the central government and Hong Kong.

The nation has taken a series of small steps toward the goal of a bigger international role for the yuan, starting from its evolution into a regional currency with Hong Kong developing as an offshore center.

To that effect, Hong Kong kicked off the long-awaited yuan settlement scheme in July, which will widen the territory's role as an offshore yuan center and test ground for the gradual liberalization of the currency.

Trade between Hong Kong and Chinese mainland companies is currently cleared in Hong Kong using the US dollar. Last year, trade between the two sides totaled $203 billion.

In addition, China has signed 650 billion yuan worth of currency swaps since December with six nations including Indonesia, Argentina and Belarus. The moves would inject Chinese money into foreign banking systems and allow foreign companies to pay for imported Chinese goods using yuan. China is also spreading the yuan's influence in Asia by making loans and investments in other countries.

"More than half of China's total trade flows, primarily bilateral trade with emerging market countries, are likely to be settled in yuan in the next three to five years," said Qu Hongbin, China chief economist at HSBC. "This means that nearly $2 trillion worth of cross-border trade flows would be settled in yuan, making it one of the top three currencies used in global trade."

The yuan trading settlement and clearing is viewed as a first step in the move toward making the yuan fully convertible into other currencies.

According to HSBC, the internationalization of the yuan was long overdue, given China's economic power relative to the limited use of the yuan overseas.

The bank estimated that China's GDP could hit $4,700 billion this year, implying it could overtake Japan as the world's second-largest economy in 2010, while it was likely to overtake Germany as the world's second-largest trading country by the end of the year.

Expanding the use of the yuan globally would be beneficial to China, even if this takes time, said Jing Ulrich, chairwoman of China Equities at JP Morgan.

"Besides setting up of the basic framework of currency conversion and hedging, foreign companies will need to become confident in using the yuan for settlement," she said.

"Full convertibility is first required for China's currency to truly become international. While it may not replace the dollar in the near future, with continued liberalization, the yuan may become a regional standard similar to the euro," she said.

The yuan is not fully convertible under the capital account, ruling it out as a reserve currency for now.

"It will take time for the yuan to gain international acceptance and for China to reform its capital markets and diversify its economy - crucial preconditions before China can elevate their currency to rival the dollar," said Kirby Daley, a strategist in Hong Kong for brokerage Newedge Group.

Yuan-bond issues

China has paved the way for international companies to issue securities in its currency for the first time, approving two foreign commercial banks in May to sell yuan-denominated bonds to overseas investor.

Such bond issues can provide multinational companies a new fundraising option at a time when credit market elsewhere lack liquidity. They may also help establish benchmark yields for future issuers. Similarly, the issues will help make the yuan a more international relevant currency and reinforce China's pledge to further open its capital markets.

Foreign companies have long been attracted to raise funds inside China. They are said to be eyeing the nation's near-50 percent saving rate and the equivalent of $7.85 trillion that individuals, corporations and the government had stored in bank deposits at the end of March, according to central bank figures.

Much done

China's foreign-exchange reserves, the world's largest, surged past the $2 trillion mark in the second quarter for the first time, while its reserves have grown more than 1,000 times since the country adopted the opening-up policy in 1978.

The country's foreign exchange reforms since 1979 have been a gradual transformation of its exchange allocation mechanism from a centrally planned one to that in which market forces play a significant role.

The entire reform process features substantial trade liberalization, initial official exchange rate adjustments, exchange market development, easing of restrictions for current international transactions and the establishment of a capital account control framework, according to the PBOC.

On July 21, 2005, the Chinese government revalued the yuan by 2.1 percent against the US dollar. Together with this revaluation, it announced it would shift its exchange rate system from a traditional dollar peg to a "loose" currency basket system, under which it would refer to a selection of multiple currencies when implementing exchange rate policies. The yuan has since appreciated about 21.14 percent as of June.

(China Daily 09/10/2009 page27)