China’s central bank allowed companies to undertake settlement of cross-border trade in the yuan and promised tax breaks, seeking to reduce the reliance of importers and exporters on the US dollar.
The People’s Bank of China will encourage banks to offer yuan settlement services from Thursday, the bank said in the regulations published on its Web site.
Transactions inside China will take place in Shanghai and four cities in the southern Guangdong province, while those outside of China will occur in Hong Kong, Macau and the Association of Southeast Asian Nations, it said.
“Companies in China and neighboring countries are facing relatively huge risks of exchange-rate fluctuations because of big swings in the US dollar, the euro and other major settlement currencies,” the central bank statement said.
China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern that a weakening dollar will cause losses on holdings of US assets.
A Chinese Foreign Ministry official said on Thursday he hoped the greenback would remain stable, while reiterating a call for diversification of the international monetary system.
“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd, the nation’s largest foreign-currency trader.
“It will protect exporters from swings in exchange rates and boost the yuan’s role in the world currency system.”
Hong Kong Monetary Authority Chief Executive Joseph Yam said on June 29 he hopes the first yuan settlement transactions will start this month after signing an agreement with People’s Bank Governor Zhou Xiaochuan.
Companies currently have to convert yuan into dollars or other currencies to settle international trade.
Tax authorities are working on the proposed rebates for exports settled in yuan, the central bank said. Bank of China Ltd will be the clearing bank in Hong Kong and Macau.
About 50 per cent of Hong Kong’s trade with China may be settled in yuan after the program starts, Stanley Wong, deputy general manager at Industrial & Commercial Bank of China Ltd, the Hong Kong unit of China’s biggest bank, said in an interview on May 5.
Hong Kong companies want to use yuan in trade because it will probably appreciate against the US dollar more than 3 per cent every year, he said.
The Chinese yuan has strengthened 21 per cent against the US currency since a dollar peg was scrapped in 2005. China has limited the yuan’s advance in the past year as a stronger currency makes its goods less competitive overseas at a time when the economy is forecast by the World Bank to expand 7.2 per cent in 2009, slowing from 9 per cent last year.
The People’s Bank of China has agreed to provide 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps to expand its usage. China and Brazil in May began studying a proposal to move away from the dollar to settle trade and use yuan and reais instead.
Asean comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Malaysia’s government has been calling for reduced dependence on the dollar for “some years” and now that China is supporting yuan settlement it is worth considering, said Tan King Tai, an executive director at Pensonic Holdings Bhd, a manufacturer of household electrical appliances in the northern Malaysian state of Penang that sources parts from China. “The dollar has become quite volatile and speculative in some ways,” he said. “If the yuan can be stable, it will help companies with their financial budgeting.”
