New Policies Help Yuan’s Internationalization

Aug. 29 (xinhua) -- China will extend to the entire country a program allowing the use of the yuan to settle cross-border trade, the People's Bank of China (PBOC) said on Aug. 23.

The extension is a crucial step in boosting cross-border use of yuan, and will better meet enterprises’ needs and further facilitate trade and investment, the central bank said on its website.

The Ministry of Commerce also released draft guidelines on how foreign investors can use yuan acquired overseas for direct investment in the country.

Foreign investors will be able to make direct investments in China with yuan legally obtained overseas, according to a draft released by the ministry, which is currently soliciting public feedback on the new rules.

Analysts said these moves indicated China's ambitions of pushing forward the internationalization of the yuan.

The pace of internationalization of the yuan speeds up. The first trial of cross-border trade settlements in yuan was approved in Shanghai in July 2009. Then the pilot area was expanded to 20 provinces, municipalities and autonomous regions in June 2010. Overseas, the program was extended to all countries and regions after being piloted in Hong Kong, Macao, and ASEAN (Association of Southeast Asian Nations). Now the new policy released on Aug. 23 allows all parts of the country to be able to use the yuan or Renminbi, in cross-border trade settlements.

It was generally regarded that the new policy can help enhance the acceptance of the currency by trade partners of the surrounding countries and regions of China and trade partners in many developing countries and regions. It can also boost the acceptance willingness of some American and European trade partners to the yuan.

China's yuan settlement in cross-border trade surged to 957.57 billion yuan ($149.62 billion) in the first half of 2011, 13.3 times more than that for the same period of last year, according to statistics from the central bank.

A PROMISING FUTURE

Qu Hongbin, chief China economist at HSBC said on Aug. 23 that the expansion of cross border settlement in the yuan will increase the settlement volume rapidly, and the yuan is likely to turn into one of the world's three settlement currencies before 2013.

Despite different views, the policy makers still decided to push forward the internationalization of the currency after weighting the advantages and disadvantages, Qu said.

In the past two years, a huge amount of yuan capital had been accumulated in the way of cross-border settlement. By the end of March of 2011, the volume had hit 8700 billion yuan.

“The yuan settlement in financial institutions in the mainland is expected to exceed 1.8 trillion yuan or even 2 trillion yuan by the end of 2011,” Bank of China President Li Lihui predicted at an interim performance conference on Aug. 24.

Considering the potential demand of the markets, the cross border settlement volume of the yuan in the next three years is expected to account for 30% of the total export-import volume, which makes it possible for the yuan to become one of the three settlement currencies before 2013, Qu said.

“The new policy obviously shows that a backflow passage is being built for RMB, which indicates the internationalization of the currency would make an important step forward,” said Chen Wuzheng, an economic reporter.

Another policy that pushes forward the yuan’s internationalization is the currency’s FDI.

“The yuan FDI is an important mark that the currency is speeding up its pace of regionalization and internationalization,” said Wang Jinbin, a professor of the Economic School of Renmin University of China.

Allowing the use of yuan obtained legally by investors to pay for foreign direct investment in the country created a passage for the currency backflow following the trend of RMB regionalization and internationalization, Wang said.

If foreigners have legally obtained yuan, they should have relevant exit, for example, to buy Chinese goods, or to invest in China.

China will remain the most attractive investment destination over the next two years, as world foreign direct investment (FDI) gradually recovers from the global financial downturn, said the United Nations Conference on Trade and Development (UNCTAD) and economists.

As the government continues to push for the country's industrial upgrading and relocation, China's FDI inflows, particularly to sectors such as services and high-technology, will remain bulky in the coming years, they said.

In China, FDI looks set to reach a new record in 2011 and could exceed last year's $106 billion, according to the Chinese Ministry of Commerce. FDI jumped 18.6 percent year-on-year in the first seven months to $69.2 billion, said the Ministry of Commerce on Aug. 23. Foreign investors set up about 15,600 new projects during the first seven months, up nearly 8 percent from the same period of last year.

"China boasts a bright future in attracting more FDI flows," said James X. Zhan, director of the investment and enterprise division of UNCTAD.

A PROCESS OF STEP BY STEP

Fan Gang, a former adviser to the central bank's monetary policy committee, expounded his unique point of view on cross-border yuan settlement and internationalization in an interview at a forum recently.

As a currency of cross-border trade, the yuan has a huge potential, but the progress of its internationalization should be a step-by-step process, Fan said.

After the global financial crisis, there came the U.S. debt crisis, Fan said, the risk of the dollar serves as the basis of the international monetary system increases sharply. Therefore, how to improve the cooperation in the financial field and how to enhance the financial fusion have become the common questions of region cooperation.

Fan proposed that the Asian countries should gradually establish a normalized mutual holding currency system on the basis of present currencies, so as to diversify the reserve currency types and decrease the reliance on the dollar.

As for whether the yuan would become a reserve currency, Fan said it depends on some important conditions, which include whether the currency is freely convertible and whether the exchange rate is freely floating, etc. Currently, it still takes time for the yuan to become a reserve currency. But as other monetary means, the yuan is highly potential.

Fan said the way of the yuan internationalization is different from that of the dollar or the Euro. It is unprecedented, so it should be a gradual process. The government should not go off at half cock.

Director of the Financial Institute of State Council Development Research Center Xia Bin said the yuan internationalization for now is just a dream, a catchword, and a direction. A pragmatic attitude is we take the yuan offshore market as a supporting point to boost its regionalization. He held the opinion that China should focus on the development of the yuan offshore market in Hong Kong and then expand it later at the right time.

Xia estimated that by 2020 China’s yuan will account for 3 – 5 percent of the world's reserve currency.

LIMITED INFLUENCE ON CHINA’S FOREX RESERVES

China's Ministry of Commerce spokesman Shen Danyang said cross-border direct investment in RMB will not have a significant impact on the amount of China's foreign exchange reserves.

More FDI in the yuan instead of foreign currencies may lead to smaller increments of foreign exchange reserves, but the permission of FDI in RMB may spur demand for the yuan and bring in more foreign exchanges, Shen said.