Dollar-wary China opens door to trade in yuan
July 3, 2009
By Bob Chen and David Yong Beijing
THE PEOPLE'S Bank of China allowed firms to undertake settlement of cross-border trade in the yuan and promised tax breaks, seeking to reduce the reliance of importers and exporters on the US dollar.
This is according to the central bank, which put the regulations on its website yesterday.
The central bank would urge banks to offer yuan settlement services from this week.
Deals inside China would be in Shanghai and four cities in the southern Guangdong province, while those outside of China would be in Hong Kong, Macau and Asian nations.
"Firms in China and neighbouring countries face… risks of exchange rate fluctuations because of big swings in the dollar, euro and other major settlement currencies," the note said.
China is promoting greater use of the yuan in global trade and finance after Premier Wen Jiabao expressed concern in March that a weakening dollar would cause losses on holdings of US assets. A Chinese Foreign Ministry official said yesterday that he hoped the greenback would remain stable, while reiterating a call for diversification of the global monetary system.
"It's China's first step to make the yuan global," said analyst Shi Lei. "It will protect exporters from swings in exchange rates and boost the yuan's role in world currency."
Hong Kong Monetary Authority chief executive Joseph Yam said last week that he hoped the first yuan settlement transactions would start this month, after sealing a deal with People's Bank governor Zhou Xiaochuan. Firms currently must convert yuan to dollars or other units to settle global trade.
Tax authorities were working on the proposed rebates for exports settled in yuan, the central bank said. The Bank of China would be the clearing bank in Hong Kong and Macau.
Half of Hong Kong's trade with China might be settled in yuan after the programme started, Stanley Wong of the Industrial & Commercial Bank of China said in May. Hong Kong firms wanted to use yuan in trade as it could appreciate against the dollar more than 3 percent every year.
The yuan has firmed 21 percent against the dollar since a dollar peg was scrapped in 2005. China has limited the yuan's advance in the past year as a stronger unit makes its goods less competitive overseas at a time when the economy is forecast by the World Bank to expand 7.2 percent this year, slowing from 9 percent last year.
The People's Bank of China has agreed to provide 650 billion yuan (R745bn) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency swaps to widen its usage.
Tan King Tai of Pensonic Holdings, an appliance maker in Malaysia, said: "The dollar has become volatile and speculative in some ways. If the yuan can be stable, it will help firms budget." - Bloomberg
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