The way China sees it, the best way to cope with USD depreciation is to use less of it.
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The Chinese government has decided to launch pilot programs for transnational RMB settlement in Shanghai and four cities in Guangdong Province, to persuade more trading partners to accept RMB, whick could lead to RMB convertibility under capital account.
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As the US government issues piles of USD to bail itself out of its financial crisis, China’s policymakers, fearing future USD inflation, is pushing forward a long-considered plan to promote RMB as regional settlement currency, both to lift its international status and to offset the risk of USD depreciation. The State Council decided recently at a work meeting presided over by Premier Wen Jiabao to launch transnational RMB settlement pilot programs in Shanghai and Guangdong Province’s Guangzhou, Shenzhen, Zhuhai, and Dongguan, and directed the People’s Bank of China (PBoC) and other relevant departments to release rules as soon as possible.
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The Bank of China (BoC) and Bank of Communications have been chosen to conduct the RMB settlement business, and HSBC and BoC Hong Kong branch are set to be their overseas business partners. The banks are waiting for the release of detailed rules for implementation.
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The State Council has ordered the launch of RMB settlement in the trade of China’s Guangdong and Yangtze River Delta with Hong Kong and Macao, and between Guangxi and Yunnan Provinces and ASEAN. PBoC is fully prepared for the pilot.
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Through transnational RMB settlement, China seeks to promote stronger economic and trade relations with its neighbors, avoid exchange rate risk, improve the trade environment, and maintain stable trade growth.
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The State Administration of Foreign Exchange (SAFE), instead of a PBoC department, will supervise RMB flow in transnational trade. An insider revealed that SAFE had been studying relevant problems such as charge off of RMB-settled trade, declaration of international payment, and RMB-denominated credit and debt under trade account.
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RMB settlement is seen as an important means of cutting trade costs and avoiding drastic exchange rate fluctuation. Designating RMB as trade and settlement currency is also another step towards raising its international status.
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China has already accumulated experience in RMB settlement in the trade with some of its neighbors. In recent months, PBoC has reinforced financial cooperation with neighboring countries and regions, and has signed bilateral currency swap agreements totaling 650 billion yuan with six countries including South Korea and Malaysia, laying a solid foundation for future RMB trade settlement.
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Guangdong Province, China’s major export gate, has long promoted RMB settlement in Guangdong-Hong Kong trade. With enterprises changing settlement habits, and the competitiveness of China’s export goods constantly strengthening, RMB settlement will be accepted in more transactions, and overseas monetary policy makers will have to take into account RMB demand from trade settlement. Guangdong is also looking to avoid influence on its huge export tax rebate while pushing forward RMB settlement.
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Shanghai sees RMB settlement as another way to promote itself as an international financial center. Besides meeting basic demands of overseas enterprises, a stronger and more accepted RMB would also suit diversified demand of overseas financial firms, e.g. allowing overseas institutions to buy and sell Yuan-dominated securities in China through designated channels. Immediate RMB convertibility under capital account would not be a prerequisite of RMB’s status as regional and global settlement currency, but greater use of the currency in overseas trade would accelerate China’s opening of its capital account.
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Theory has it that RMB will move through three stages on its way towards globalization: RMB trade settlement; RMB-denominated financial transaction; and RMB as one of the world’s reserve currencies. Although there’s a long way to go, RMB globalization has become a national strategy, and hopes are implementation will go smoothly.
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