Increasingly companies want Yuan to move towards being a global currency

China plans to expand settlements of international trade using yuan to as many as 18 more provinces and cities to meet rising demand from companies, two bankers involved in the program said. “But to move towards being a global currency with full convertibility will take a bit more time.” said Bernard Yeung, head of Asia currency trading at National Australia Bank Ltd. in Hong Kong.

Cross-border transactions using the currency have been allowed in Shanghai and Guangdong since July last year, to reduce reliance on the U.S. dollar. Authorities may permit them in areas including Guangxi in the south and Heilongjiang in the north, said the executives at Chinese state-controlled banks, who asked not to be identified before a government announcement. A statement may come as soon as this month, said the bankers, who were briefed by regulators this week.
“More and more Chinese companies want to use the yuan in international trade because of higher volatility in foreign currencies,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s third-largest lender by market value. “The next step would be to provide more investment channels for overseas companies to invest yuan.”
The new rules may let Chinese companies settle trade in goods and services in yuan with counterparties around the world, the two bankers said. The municipalities added to the program include Beijing, Tianjin and Chongqing, while the provinces include Shandong, Inner Mongolia, Liaoning, Jilin, Fujian, Sichuan, Xinjiang, Yunnan, Zhejiang and Jiangsu, they said.
A People’s Bank of China official, who declined to be named, said yesterday he hasn’t received notification of a planned announcement. Officials at the press offices of Heilongjiang and Guangxi provinces, said they couldn’t comment. Officials at the Bank of China, Industrial & Commercial Bank of China Ltd. and Bank of Communications Ltd., who asked not to be identified, declined to comment.
Appreciation Bets
Speculation that China will end the yuan’s 22-month peg to the dollar drove 18.4 billion yuan ($2.7 billion) in local- currency settlements in the first quarter, five times more than in the second half of last year, the central bank said on May 10. China is promoting use of the yuan for trade and finance after purchases of U.S. currency to defend the peg swelled the nation’s foreign-exchange reserves to $2.45 trillion.
The yuan’s 12-month non-deliverable forwards strengthened 0.1 percent to 6.6606 per dollar, reflecting bets the currency will gain 2.5 percent from the spot rate of 6.83, according to data compiled by Bloomberg. China has halted the yuan’s advance since July 2008 after allowing it to climb 21 percent in the previous three years.
China started allowing companies in Shanghai and four cities in the southern province of Guangdong from July 2009 to use yuan in trade with Hong Kong, Macau and members of the Association of Southeast Asian Nations.
Global Pressure
“The volume of transactions is not meaningful at this stage,” said Richard Yetsenga, a global currency strategist at HSBC Holdings Plc in Hong Kong. There is the “inherent conflict” that the yuan is convertible for trade and not for investment, he said.
Officials in India and Brazil have joined the U.S. in calling for China to allow its currency to appreciate as Group of 20 finance ministers prepare to meet in Busan, South Korea, on June 4-5. India’s Finance Minister Pranab Mukherjee said in an interview in New Delhi yesterday that China may signal moves toward revaluing the yuan within a month to temper criticism its currency is aiding exports. Brazil’s central bank governor Henrique Meirelles on April 20 said a stronger yuan is “absolutely critical.”
China is also considering allowing the yuan to trade against the Russian ruble, South Korean won and Malaysian ringgit to promote its use in cross-border trade, an official at the China Foreign Exchange Trade System said last month.