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Cross-border trade in yuan to soar

Half of China's cross-border trade transactions could be settled in the Chinese yuan by 2015 - with lower transaction costs and exchange-rate risks - thanks to China's gradual internationalisation of its currency, says HSBC.

"The People's Bank of China has been trying to internationalise the yuan but has done it gradually," said HSBC Thailand head of commercial banking Kanoksak Mokkamakkul. "Foreigners can now hold and start trading the yuan." Trade volume settled in the yuan totalled US$3.49 billion in May 2010 alone, just a fraction of the country's trade volume for the whole year. China plans to expand yuansettled trade and push the yuan to become one of the world's major currencies for trade and investment. In the first 11 months of 2010, China registered US$2.68 trillion in its crossborder trade, while it had US$2.21 trillion for the whole of 2009. "Half of the trade figure is colossal and it will be much higher in the future," Kanoksak said. China recorded 10.3percent economic growth last year, while this year HSBC estimates the country will expand 8.1 per cent. The liberalisation of the yuan has been accomplished in gradual steps. In 2005, China adopted a managed float regime for its currency, which was previously pegged to the US dollar. During the 2008 global economic crisis, the country brought its currency back to the fixed regime. When the situation calmed in 2010, its currency was switched back to the managed float. This year the yuan is expected to appreciate by about 4 per cent. Chinese crossborder trade settlement had previously been conducted in US dollars only. Chinese traders had to do the currency conversion onshore themselves. Yuanbased crossborder trade settlement kicked off in mid-2009 when the Chinese central bank granted permits to 365 exporters in five provinces and a few local banks to settle trade in the currency. This was permitted only with specific trading partners such as Hong Kong and certain Asean countries. In June 2010, the People's Bank of China (PbC) increased the number of provinces allowed to settle trade in the Chinese currency to 20. These provinces account for about 95 per cent of China's international trade. The liberalisation means 67,359 exporters can now engage in yuan trade settlements and an unlimited number of importers can conduct the same. All of China's trading partners can engage in yuansettled transactions. Today, Europe is China's largest trade partner, accounting for 21.3 per cent of China's crossborder trade in the first 11 months of 2010, followed by the United States at 13 per cent and Japan at 10 per cent. Thailand accounted for about 1.8 per cent. Exports of services have also been liberalised. HSBC expects this relaxation trend to continue in 2011 and onwards. With rising yuan trade settlements, facilities such as yuan accounts, products and services will follow, Kanoksak said. Early this year, the PBC gave the green light for Chinese enterprises to use the yuan in overseas direct investment (ODI) - on a trial basis. Eligible Chinese enterprises can now use the yuan for ODI to establish new companies, acquire equity and engage in mergers and acquisitions. Now that the yuan has trade and investment channels abroad, the Chinese currency could go global faster than expected. HSBC expects the yuan to become the world's numberthree currency behind the US dollar and the euro by 2015. Even though the yuan has become more internationalised, the Chinese central bank still controls nontraderelated capital flows. Thus, aside from the onshore yuan market, there is also the offshore market, where the Chinese currency is in less supply and more expensive. "China has liberalised the yuan in trade and services and it is easier for the yuan to flow out of the country," Kanoksak said. "Chinese importers will make payment in the yuan and this will release more and more of the yuan outside the country and enlarge the currently limited supply of the yuan on the offshore market. Eventually, [exchange rates of] the yuan on offshore and onshore markets will converge." If China and another country trade in the yuan, inefficiencies and hedging costs could be reduced, he said. For example, Thai exporters and Chinese importers normally hedge against the dollar, adding to costs, as products are quoted in the US currency. Asia and China are seen as growing economies and everyone is trying to step in. "More opportunities exist in China. If there is concern, it's about new processes. Everything must be clear about how the fund is transferred from HSBC to the Bank of Communications and what documents are needed. We need to know what regulators require at every point. We already went through those hurdles," Kanoksak said.


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