Saturday July 11, 2009

Yuan settlement takes off smoothly

SHANGHAI BUND WITH CHOW HOW BAN

A WEEK into the new policy on yuan settlement for cross-border trade, Chinese companies and their foreign trade partners are finding it a breeze.

However, this being a pilot project by China’s Central Bank to test the waters, problems related to the renminbi’s exchange rate and convenience of settling in yuan may yet pop up in the coming months.

Late last year, the State Council made its first announcement on China’s intention to reduce its dependence on the US dollar.

Four months later, the government designated Shanghai and four cities in Guangdong province – Guangzhou, Dongguan, Shenzhen and Zhuhai – as participants in a test on the use the yuan for cross-border transactions.

The first yuan trade settlement was carried out in Shanghai on July 6.

Indonesia-based PT Central Energi, through its Bank of China International account in Hong Kong, made payment of 13.68 million yuan (RM7mil) to Shanghai Electric Group for a power facility deal.

The money was credited into the Shanghai company’s Bank of China account in the city.

In another deal, Shanghai Huanyu Import & Export Co signed a contract to import 300,000 yuan (RM156,000) worth of lights and audio equipment from Hong Kong-based Ever Keen International Ltd.

The transaction was handled by HSBC in Hong Kong and Bank of Communications in Shanghai.

Previously, Chinese companies had to convert yuan into US dollars or other currencies to settle international trade.

So far, only Bank of China and Bank of Communications have been authorised by the central bank to conduct yuan trade settlements for local companies.

The pilot project only covers trade between companies in China and their trade partners in the special administrative regions of Hong Kong and Macau and Asean members.

Even then, not all Chinese companies can trade in yuan, a source close to the participating banks said. For a start, this is limited to those companies approved by the Chinese government.

Bank of China and Bank of Communications signed clearing agreements with participating banks in Hong Kong, Macau, Malaysia, Thailand, Singapore and Indonesia over the week.

It is learnt that Maybank in Malaysia, OCBC in Singapore and Bank Mandiri in Indonesia are among the 11 Bank of China partners overseas.

Bank of Communications has made clearing agreements with eight banks, including HSBC and Hang Seng Bank.

Among challenges the banks and their clients may face will be whether participating banks can offer competitive exchange rates restricted by the regulatory rate set by Chinese authorities, and whether the payee can keep or trade the yuan in the foreign bank after the transactions.

Nevertheless, a new settlement system will mean exciting times in the banking industry. Economists believe that it will augur well especially for local companies.

The central bank had said that the project addresses the concerns of companies in China and neighbouring nations of relatively huge foreign-exchange risks, especially as major currencies like the greenback and Euro have been fluctuating since the onset of the global financial crisis.

The Shanghai municipal government said the policy will make the renminbi a more recognisable currency internationally, in line with the city’s aim to become a global financial centre.

Mayor Han Zheng said: “The yuan settlement trial in Shanghai has great significance for the city’s vision to become an international financial centre.”

The pilot project will also benefit cities in the Yangtze River Delta region.

Shanghai Daily quoted central bank vice-governor Su Ning as saying that the programme would help bolster the mainland’s trade with Hong Kong, Macau and Asean nations.

He said the yuan, which had strengthened more than 20% against the greenback, was a stable trading currency comparatively.

Xu Weimin, chairman of Shanghai Silk Group, which also used the yuan for trade settlement, said: “It’s always good to have an additional choice.

“The US dollar’s fluctuations have hurt us badly. If our clients agree, we would prefer to use the yuan to settle trade.”

To make transactions easier, the central bank has outlined ways for participating overseas banks to source for Chinese currency.

Financial institutions in these places will be able to buy or borrow in yuan from mainland lenders for the first time to settle trades.

Mainland lenders can also provide trade finance to overseas firms as well.

(Prior to this, the central bank had six currency swap deals valued at 650 billion yuan or RM338bil with Hong Kong, Malaysia, Indonesia, South Korea, Belarus and Argentina to allow its counterparts to sell yuan to importers buying Chinese goods.)

The new yuan trade move came amid China’s increasing call for the world monetary system to move away from US dollar dominance.

Premier Wen Jiabao, in March, expressed concern that the weakening US dollar would cause losses on the US assets it holds.

As of May, the United States owed China US$772bil (RM2.8 trillion). The United States had to issue a larger amount of Treasury bonds to finance its economic rescue packages and budget deficit, and this threatens devaluation of the debts and the dollar.

China has pressed for a bigger role for developing countries in international monetary policy, but is not quite ready to push for a new global currency to replace the dollar.

News

Saturday July 11, 2009

Yuan settlement takes off smoothly

SHANGHAI BUND WITH CHOW HOW BAN

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