HONG KONG - The Chinese government's decision this month to let exporters in a
small number of cities settle their overseas trade in yuan rather than in US
dollars has far-reaching implications, according to economists, even though the
immediate impact is minimal.
The trading hubs of Shanghai at the mouth of the Yangtze River and Guangzhou,
Shenzhen, Zhuhai and Dongguan in the Pearl River Delta further south can use
the yuan in overseas trade settlement, a State Council, or cabinet, meeting
chaired by Premier Wen Jiabao said. The two deltas are the base for most of
China's export-oriented industry.
The settlement scheme is voluntary and of benefit to relatively
small groups, said Pauline Loong, senior vice president in charge of China
policy and risk research at CIMB-GK Securities (HK) Ltd, but "the implication
is far-reaching. The scheme extends the use of the Chinese currency outside of
the mainland. We see this as the first step on the road to full liberalization
of China's capital account and full convertibility for the renminbi," one term
for the Chinese currency, also known as the yuan.
Most international trade is carried out in US dollars. The Chinese scheme is
aimed at reducing the risk from exchange-rate fluctuations and giving impetus
to declining overseas trade, a statement posted on the Chinese government
website said. Further details of related regulations will be released as early
as possible, the statement said.
China's exports plunged 25.7% year-on-year in February as overseas consumer
demand fell away amid the deepening global financial and economic crisis.
The move to allow international trade settlement in yuan in select cities is in
line with the government's gradual approach to currency liberalization, said
Jing Ulrich, China equities chairwoman at JP Morgan. Beijing earlier allowed
companies in Hong Kong and Macau to use yuan to settle deals with partners in
Guangdong and the Yangtze Delta.
A similar yuan settlement trial has been proposed for exporters in the Guangxi
Zhuang Autonomous Region and Yunnan province in southwestern China, which would
be allowed to use the Chinese currency to settle trade with their counterparts
in the 10 countries of the Association of Southeast Asian Nations (ASEAN).
Details of the programs haven't yet been disclosed.
Loong said the extension of yuan settlement to five mainland cities was
voluntary and of benefit to relatively small groups, citing 1) foreign
businesses with a need for Chinese currency, such as importers of Chinese goods
who also export to China or who may have operations with yuan outgoings, such
as a factory on the mainland; and 2) mainland businesses with enough commercial
clout to push their partners to accept a yuan settlement or those with trade
partners with a need for the Chinese currency.
Transaction volumes are likely to be modest at the outset, but "that should not
worry Beijing too much", said Loong. "The scheme is to test-run convertibility
on the capital account while giving a helping hand to importers and exporters.
The volume will rise when the Chinese currency gains market acceptance."
China's move to extend use of the yuan comes as concern grows that increased US
government spending to halt the financial crisis will reduce the value of the
US dollar. That could reduce the amount of money earned by Chinese exporters if
the yuan were to strengthen against the US currency. It could also reduce the
value of US Treasuries held by the Chinese government.
It is estimated that of China's US$1.95 trillion in foreign exchange reserves
at the end of last year, the largest in the world, 70% is invested in US
dollar-denominated assets. Increased use of the yuan in international trade
could help reduce countries' use of US dollars.
Ulrich said funding of the US government's stimulus plan may lead to a
depreciation of the US dollar. "Encouraging China's trading partners to settle
in renminbi could help reduce exchange-rate risk and save on transaction
costs," she said.
China's central bank governor Zhou Xiaochuan recently said that to reduce the
risks associated with the current US dollar-denominated reserve currency
system, it may be ideal in the long run to replace the dollar with a new
international reserve currency under the mechanism of the International
Guangdong province governor Huang Huahua last month said 300 companies in
Guangzhou, Shenzhen, Zhuhai and Dongguan will be allowed to use yuan for the
yuan settlement program with enterprises in Hong Kong.
Among those looking forward to the scheme is Liang Yufeng, vice general manager
of Guangxi Sanhuan Enterprise Group, a leading exporter of ceramic tableware.
Liang said fluctuation of the dollar was a serious problem for the company,
which gets about 55% of its sales in Europe and the US. A profit decline of 110
million yuan (US$16 million) last year was largely attributable to exchange
rate changes, he said.
The yuan strengthened about 6% against the US dollar last year and has
appreciated about 21% since a fixed exchange rate was scrapped in July 2005.
Liang said his company was happy to use the yuan to do business with partners
and the scheme could help Sanhuan Enterprise, with employs 6,700 workers, trade
with partners in Southeast Asia, where it gets 15% of total sales.
"Since the beginning of last year, the company has tried to find ways to reduce
the risk from exchange rate fluctuations," he said. "The most effective is to
add clauses to contracts with the permission of trade partners about the trade
settlement. For example: the value of a container of goods is 10,000 yuan. In
disregarding the change in the exchange rate, the buyers have to pay the same
value [10,000 yuan] for the merchandise in US dollars," he said.
He conceded that only larger and long-term clients were willing to accept such
a condition. Liang also had doubts whether partners would be willing to pay in
yuan once the trial gets underway.
"As the yuan is not freely convertible, our partners will be forced to exchange
their own currency into US dollars first before paying yuan in overseas trade
settlement, which might be a trouble for them."
Importers, including Simon Shi, former president of the Hong Kong Small and
Medium Enterprises Association, also saw difficulties with yuan settlement if
China does not relax its foreign-exchange controls.
"Even if I have a personal renminbi account, I cannot withdraw a million yuan
and move it between the mainland and Hong Kong," Shi said. "This is because in
Hong Kong, we cannot change more than 20,000 yuan in each transaction, and
cannot remit more than 80,000 yuan a day."
Frank Song, head of the Center for China Financial Research at the University
of Hong Kong, echoed this concern, saying China's foreign-exchange controls
could hinder acceptance of the yuan. This meant, for example, that a country
couldn't sell yuan to defend its own currency in a balance of payments crisis.
Song saw yuan trading settlement and clearing as a first step in the move
towards making the yuan fully convertible into other currencies.
Expanding the use of the yuan globally would be beneficial to China, even if
this takes time, Ulrich said.
"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 renminbi may become a regional standard similar
to the euro," she said.
Olivia Chung is a senior Asia Times Online reporter.