Beijing Aims to Expand
Foreign Trade in Yuan
By DENIS MCMAHON
SHANGHAI -- China is rolling out plans that would make the yuan more useful across Asia -- and would gradually modernize its currency system while allowing Beijing to retain significant influence over the way the currency is used.
In its latest move, China's government this week designated five of its biggest trading cities to take part in a planned program allowing foreign trade to be conducted fully in yuan, instead of in dollars or other major global currencies as it is now. The plan -- which could start in a few months -- will initially involve trade with merchants in Hong Kong and Southeast Asia, but it could be expanded to include other overseas locations. In a related effort, China's central bank has set up in recent weeks tens of billions of dollars in currency swaps with South Korea and other countries, which could make the yuan more widely available outside China.
China is the world's third-largest economy, but its currency is little-used outside its borders. The government maintains strict rules that make it difficult for companies to exchange yuan for foreign currencies -- and which help authorities maintain control over the yuan's exchange rate.
The new steps will loosen that system but only within careful parameters. The moves could lead to further opening of China's capital markets, creating need for yuan derivatives and investment options outside of the country. Eventually, the measures could help make the yuan a more important currency globally and reduce the use of the dollar by one of the world's biggest trading nations.
Using the yuan to settle trade deals would help Chinese companies reduce the risks of exchange-rate fluctuations. Many Chinese exporters lost money last year because the dollar's value fell after they signed orders but before they were paid.
Among the biggest immediate beneficiaries of China's trade-settlement plans will be large Chinese companies that already have significant trade between their business units around the region, analysts say. Currently, many Chinese conglomerates conduct intracompany trade using U.S. dollars, which can be expensive and risky.
So far, China's plans are limited to liberalizing use of the yuan in trade, rather than investment. That appears aimed at limiting the exposure China's economy might face from foreign-exchange volatility and other risks of free-flowing capital.
Many Chinese officials say the global financial crisis has vindicated Beijing's commitment to strict market supervision. Analysts say the government will avoid opening its financial sector faster than absolutely necessary.
One impediment to making the yuan a trade-settlement currency is that so little of the currency is held overseas. The six currency swaps it has signed with central banks around the world let other central banks swap their currencies for yuan.
No timetable for launching the trade-settlement mechanism has been announced, and few details are known, but Hong Kong government officials expect Hong Kong to have a major role. "We have the infrastructure ready to be the first," said Julia Leung, under secretary for financial services and treasury in Hong Kong.
Hong Kong has a separate financial system, while officially part of China. Its banks are also the only ones in the world Beijing encourages to hold yuan, which they receive as customer deposits, and Hong Kong has developed limited yuan-clearing services. In 2008, yuan deposits in Hong Kong increased 86% to 56.1 billion yuan ($8.2 billion).
Analysts predict other access for Hong Kong. For instance, Hong Kong banks may be allowed to set up accounts with mainland banks to exchange yuan directly.
—Peter Stein in Hong Kong contributed to this article.Write to Denis McMahon at denis.mcmahon@dowjones.com
