Chinese and foreign firms to use yuan to settle transactions
Beijing (AsiaNews/Agencies) – China is planning to use the yuan in lieu of foreign currencies such as the US dollar to settle trade transactions within three years. The volume should reach almost US$ 2 trillion and involve designated mainland areas, Hong Kong, Macau and members of the Association of South-East Asian Nations (ASEAN).
At present the yuan is not freely convertible, and transactions between Chinese and foreign companies have to be done in foreign currencies, especially dollars. But recently Beijing designated 400 companies that could settle trade in yuan, part of a long-term plan to make the yuan an international currency and reduce the country's reliance on the dollar.
Under the yuan trade settlement scheme Chinese authorities expect exporters and importers to benefit from lower costs and exchange rate risks.
At the same time Beijing has introduced a series of measures, including tax breaks, trade finance and currency swap deals, in cooperation with other central banks to encourage wider use of the yuan.
For Qu Hongbin, an economist at HSBC, the “pace of [internationalisation of the yuan] is likely to be faster than many expect. [. . .] This could potentially lead to nearly US$ 2 trillion worth of annual trade flows.” This means that “40 to 50 per cent of the mainland's total trade” could “be settled in yuan each year by 2012.”
More importantly the HSBC economist expects yuan trade settlement over the next three to five years to cover all mainland trade with Asia, excluding Japan and other emerging markets.
However, Billy Mak Sui–choi, an associate professor at Hong Kong Baptist University, is more cautious. Speaking to the South China Morning Post he said that the scope of lending was still limited and only 400 companies at this stage were qualified to settle trade in yuan. That was a clear sign that Beijing was being very cautious.
Similarly, for many observers China’s proposal ahead of the G8 Summit in L’Aquila (Italy) to replace the US dollar as the world’s reserve currency with the International Monetary Fund’s Special Drawing Rights (a virtual currency based on a basket of currencies that include the US dollar, the euro, the pound and the yen) was wide off the mark.
Overall economists do agree that the yuan is bound to play a greater role in the world’s economy but differ over how it will happen.
“The [yuan] will clearly internationalise significantly over the next five to ten years. Over a longer period [10 to 20 years], it may emerge as a secondary reserve currency like the Japanese yen,” wrote Arthur Kroeber in the China Economic Quarterly. But it is not likely to replace the dollar.
Also a consensus exists that a strong Chinese economy will not be sufficient to sustain a qualitative change in the yuan’s role. For that to happen, Beijing must scrap capital controls: central banks and other foreigners would have to be able to invest freely in onshore yuan financial assets such as stocks, bonds and bank deposits and to freely repatriate their capital.
But this, Beijing is not prepared to do so in the immediate future. It is too concerned that the yuan might appreciate too much in relation to other currencies, increasing the price of its manufacturing goods with a negative impact on exports.
Indeed in the last 12 months Chinese authorities have prevented the yuan from appreciating against the US dollar, even though everyone agrees that it is undervalued against the greenback.
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