Monday, January 17, 2011

Pilot Program to Internationalize the RMB

CHINA has launched a pilot program to let domestic companies take Chinese currency overseas to make investments. The move, part of its effort to make the yuan a global currency, came as the central bank set the currency's reference rate at a new high against the US dollar.

Beijing's guiding of the yuan higher in the past two days follows a familiar pattern, coming in the run-up to President Hu Jintao's state visit to the US next week.Such gestures have been typical ahead of high-level official meetings or international events that tend to produce strong pressure on China's exchange-rate policy.The yuan has risen 0.6 per cent against the US dollar in the past two days and accumulated a 3.4 per cent gain since Beijing effectively depegged its currency to the US unit in June. It now trades at around 6.60 to the US dollar.

In recent months, China has also stepped up efforts to encourage the yuan's use outside China, further loosening its grip on the currency as it aims to become less dependent on the US dollar for trade and investment.The announcement about overseas investment marks the latest incremental step in the effort and builds on an experiment that allows Chinese and foreign firms to settle cross-border trade in yuan.

The People's Bank of China said domestic firms can use the yuan to invest in new ventures, mergers and acquisitions and stake purchases overseas.While important, the pilot project's initial impact is likely to be small because of foreign investors' limited ability to use the yuan, both in and outside China.

In addition, as long as observers expect the yuan to continue to rise, Chinese firms may have few incentives to invest in the currency, instead of the US dollar, for transactions overseas.The central bank said companies participating in the trial must declare the amount of their proposed outbound investment to regulators.

It added that firms can send profits from such offshore investments in yuan back to China.The Hong Kong Monetary Authority welcomed the announcement in a statement."This is an important step in yuan internationalisation. This will help boost the usage of yuan in global investment and help Chinese companies invest overseas, following China's move to boost the use of the currency in trade," said Wen Bin, an analyst at Bank of China.

But the implementation of the pilot project could be rather complicated, he said, as some countries may have restrictions on using yuan for investment.The success of the trial program will also depend on the existence of banks outside China that can convert the yuan into local currencies, said Jinny Yan, an economist at Standard Chartered."In the near term, for most Chinese companies investing overseas, it is of course still going to be (US) dollars," she said, adding it is hard to see any benefit for the majority of Chinese firms in settling foreign investments in yuan at the moment.

In early December, the PBOC expanded a yuan-trade settlement trial to 67,359 exporters in 16 Chinese regions, up from the original 365 companies.In June, it had widened the program to 20 Chinese regions, up from the original five cities when the program was launched in July 2009.

Also last month, China's foreign-exchange regulator said it would allow the country's exporters to park their foreign revenue overseas, a move that could also potentially reduce pressure on the yuan to appreciate.

Previously, Chinese exporters were required to repatriate their foreign-currency earnings and exchange them for yuan under a "surrender" requirement.But the influx of foreign exchange caused problems for monetary authorities, contributing to inflation pressures and adding pressure on the yuan to appreciate.

In another significant step in the country's plan to foster global trading in its currency, China also recently launched trading in its currency in the US for the first time.State-controlled Bank of China is allowing customers to trade the yuan in the US, expanding the nascent offshore market for the currency that began last year in Hong Kong, though analysts and regulators say the scope of what Bank of China is offering appears limited.

Additional reporting: Aaron Back and Esther Fung

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