Yuan to be used more in foreign trade

Use of the yuan in China’s foreign trade may go up from 2.5 percent last year to around 8 percent in 2011, estimated a Chinese banking official Wednesday. However, foreign trading partners may be less inclined to trade in the currency due to capital controls, making it difficult for the yuan to flow back to the Chinese mainland, economists said. 

In the first quarter, 6.84 percent of foreign trade was settled in the yuan, said Zhang Guangping, vice head of the Shanghai branch of the China Banking Regulatory Commission.

Cross-border trade settled in the currency totaled about 500 billion yuan ($77 billion), accounting for about 2.5 percent of China’s foreign trade last year. 

The yuan is expected to be one of the three major currencies used in global trade after the dollar and euro this year, according to a recent HSBC survey of 21 major global markets.

Since July 2009, China has been promoting the yuan in cross-border trade to reduce its reliance on the less-valued dollar and to internationalize its currency. 

“Many trading companies in China hope to settle trade in yuan to avoid exchange losses caused by the appreciating yuan against the USdollar when trading with ASEAN partners,” Xu Ningning, secretary-general of the China-ASEAN Business Council Chinese Secretariat,told the Global Times.

By the end of last year, 67,724 import and export companies in 20 areas, including Beijing, Tianjin, Sichuan and Xinjiang, were allowed to conduct trade in the yuan. 

Trade settlement in the yuan accounts for a very small part of the total $292.78 billion in trade from the China-ASEAN free trade area, Xu said. 

Foreign exporters are more willing to accept yuan for trade settlements than importers in China, said Lu Ting, China economist with the Bank of America Merrill Lynch.

With the yuan’s continuing appreciation against the dollar, foreign exporters can enjoy exchange gains. However, foreign importers can bear higher exchange costs for yuan payments to Chinese trading partners. 

As of Wednesday, the yuan had appreciated by about 5 percent against the US dollar since mid 2010.

The main problem is that large amounts of yuan accumulate in Hong Kong – an offshore trade settlement center for the currency – and cannot flow back into the mainland due to capital controls, Lu said.

Hong Kong accounted for 75 percent of total trade settlement in the yuan last year, said Peter Pang, deputy chief executive with the Hong Kong Monetary Authority, in February. 

The one-year deposit rate of yuan in Hong Kong is only 0.7 percent, much lower than the mainland’s 3.25 percent, Lu said. Due to capital controls, this aggregated amount of the yuan cannot be reinvested in the mainland for higher returns. This discouragesforeign trade partners from using the yuan for trade settlements, Lu added.

By Wang Xinyuan

  • Source: Global Times
  • [23:13 May 11 2011]
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