Intra-regional trade puts yuan on world course

Full internationalisation in business settlements seen

Rapid growth in intra-regional trade will be one of the key sustainable drivers in turning the Chinese yuan into the third-largest currency in global trade settlement by 2015, with full convertibility foreseeable three years after that, according to HSBC's chief economist for China, Qu Hongbin.

Qu is bullish about the forecast, seeing no derailment in the path towards the yuan's internationalisation.

In spite of uncertainties in the western hemisphere, which are dragging on the Chinese economy, he said China needed to be more integrated with the world in order to sustain its growth, and this was supported by the direction of Chinese policy.

"In the last five years, intra-regional trade has been a key driver for [China's] trade growth. Trade with Asean has escalated at a much faster speed compared to the rest of the region. This will continue. China is more open and this will only increase intra-regional trade," he said during a teleconference yesterday, days after the country welcomed in its new leadership.

Trade with Asia now accounts for 40 per cent of China's overall commerce, and the ratio is expected to pass 50 per cent in the next few years. Trade with all emerging markets, including those in Asia, is now 60 per cent of the total.

HSBC expects 50 per cent of China's emerging-market trade, or more than 30 per cent of its total trade, to be settled in yuan by 2015, paving the way for full convertibility of the redback.

Qu noted that companies in Asia were now more ready to use yuan in settlement "to stay away from the US dollar" than their counterparts in the US and the European Union, which are sticking to the greenback and the euro.

Yuan settlement last year accounted for 12 per cent of China's trade, up from 9 per cent a year earlier and 3 per cent in 2010. Yet, the ratio is relatively small in the global context, as China is the world's second-largest economy and its biggest exporter.

Yuan settlement accounts for less than 1 per cent of worldwide trade, despite the fact that China's economic size is more than 10 per cent of the global economy and the country controls over 10 per cent of the world's trade. China also controls over 12 per cent of global foreign direct investment and overseas direct investment.

The economist said that to facilitate the currency's internationalisation, offshore yuan transactions would increase sharply. At present, Hong Kong controls 80 per cent of the yuan-denominated currency transactions, with the rest shared by Taiwan, Singapore and London.

Qu believes China's central bank is ready to ensure liquidity in the offshore market.

Combined daily turnover in the foreign-exchange spot and forwards markets in yuan in Hong Kong has risen spectacularly since they were launched in 2010, more than doubling to US$8 billion (Bt236 billion) last year. However, that is small compared to over $3 trillion in US dollars and other currencies.

"If we are right on the trade settlement forecast, the volume could top 2 trillion [transactions] a year, or $500 billion-$600 billion," he said.

According to HSBC, as of last August, more than 10,000 financial institutions were doing business in yuan, up from 900 in June 2011. Yuan-denominated trade volume also surged to 245 billion transactions last year.

Policy-makers in Beijing are committed towards the long-overdue currency internationalisation, Qu added. Policies are in place to promote yuan-denominated settlements as well as increase liquidity of the yuan across the globe. Until full internationalisation kicks in, the Chinese central bank is expected to strike more currency-swap agreements with other central banks.

"It is actively looking for swap deals to forward the convertibility. While Asia is a priority, there is no reason to stop the People's Bank of China sending more deals to other countries," he said.

During this period, Chinese authorities are urged to further reform the financial markets, particularly the bond market, which is dominated by government players. This would allow local companies to raise more funds from the capital market, diversifying risks from the banking system which is now the only source of funds for Chinese firms.

This would also also allow more foreign players in the bond market, said the economist.

Foreseeing a gradual recovery in the Chinese economy, Qu expects further expansionary fiscal and monetary policies to ensure growth of more than 8 per cent this year.

In the long term, he foresees the need for more green investment, particularly in the areas of waste and air pollution, in order to sustain economic growth.

In a good sign, he said policy-makers realise that the level of industrial pollution, which results from lowering costs so that Chinese companies can achieve high margins, comes at the expense of economic sustainability.

The new government's three key agenda items are continued growth, reforms, and balanced growth that includes more focus on environmental issues, he said.

He is also optimistic that ongoing disputes with Japan will not flare up, as both sides are showing a strong intention to minimalise the impact. "We are just waiting for real actions," he added.