After a wait of months, the Chinese government is launching RMB settlement for transnational trade, the beginnings of an attempt to push RMB into the international settlement system. The effect, though, will depend on whichever the settlement system is accepted by trading partners.
Five departments, including the central bank and the Ministry of Finance, released rules and set principles for RMB settlement in transnational trade. Shanghai will become the first pilot city for the operation of RMB settlement, followed by Guangdong Province. The Bank of China and Bank of Communications are the first banks to be approved to operate such settlement.
At present, China’s foreign trade is mainly settled by USD and the euro. The Chinese government is promoting RMB to be the settlement currency in Asia. This may first come to pass in Hong Kong. Hong Kong has long sought to reinforce its ties with the mainland, and in the future HKD will likely be pegged to RMB rather than the dollar.
Chinese importers and exporters will certainly welcome a RMB settlement system, as it will help them avoid exchange rate risk. The problem will come in the preferences of overseas traders.
"This will be the main problem in the early stage," says Lu Zhengwei, a chief economist with China Industrial Bank. Another problem lies in how overseas enterprises can acquire RMB for their payment.
Chief economist Lian Ping with the Bank of Communications thinks that not many enterprises will be willing yet to accept RMB. Companies that are do so because they want to do business with China. Some accept it because their Chinese partners dominate the trade, and can decide the price and choose the settlement currency.
Chinese regulators worry that openness in RMB settlement may lead to the risk of transnational fund overflow as the result of fake trades. They plan to be very strict in granting qualification to trade companies. Every company and fund involved in every trade will be under the supervision of the central bank.
Â