Smaller firms tipped to win from open yuan trade
Beijing's latest move to relax yuan trade settlement rules will help smaller businesses use the currency to settle cross-border trades, but it's unlikely to lead to a big boost in volume.
The People's Bank of China (PBOC) said earlier this month that it was expanding the yuan trade settlement scheme to allow all mainland firms to settle cross-border trades in yuan. Previously, only 60,000 companies were allowed to do so.
The central bank's announcement about the new rules underscores the success of a 21/2-year trial by Beijing to globalise the yuan, which it hopes will one day rival the US dollar and the euro as a major trade-settlement currency.
In July 2009, China opened the door an inch, allowing 365 firms to settle trade in yuan, but then expanded that to 60,000 companies in 2010 and volume ballooned as a result.
There were 2.08 trillion yuan (HK$2.54 trillion) worth of trade settlements as of December 2011, representing about 9 per cent of all China's imports and exports.
Ngan Kim-man, Hang Seng Bank's head of RMB business strategy and planning, said the biggest beneficiaries of the new move would be small and medium-sized enterprises (SMEs) on the mainland.
'Before the expansion, the 60,000 companies in the former list were mainly bigger companies. Many SMEs could not settle trades in yuan even if they wanted, because they weren't on that list. This expansion will open it up so all companies ... can do yuan trade settlement,' Ngan said.
He said the new scheme also made life easier for banks because they no longer needed to check if clients were on the list to settle a trade in yuan. But Ngan said the expansion would not boost yuan trade settlement substantially as those 60,000 companies already accounted for 90 per cent of cross-border transactions.
Hong Kong officials said the move was good for the city.
'This is another facilitation measure to expand the use of yuan in cross-border trade settlement,' Undersecretary for Financial Services and the Treasury Julia Leung Fung-yee said. 'As more than 80 per cent of yuan trade settlement is handled by banks in Hong Kong, we expect the measure to be conducive to expansion of such trade settlement business by banks in Hong Kong.'
HSBC Asia-Pacific chief executive Peter Wong Tung-shun said the latest regulatory relaxation would help the market grow. 'As China is the world's largest exporter, more Chinese trading companies will be encouraged to use the yuan in international trade as a result of this positive regulatory development,' Wong said.
Ann Lin Khoo, Hong Kong cash management product manager for JPMorgan's Treasury Services, said many clients who sourced from China had been keen to pay their Chinese suppliers in the local currency, but the adoption rate of the currency has been slower mainly because of the former restriction. The latest relaxation would help encourage global companies to use yuan to pay their mainland suppliers.
'In the near term, we see potentially higher cross-border trade flow from companies who can now pay yuan to any exporter in China. This recent news reinforces the market expectation that up to half of China's trade will be settled in the currency in five years,' Khoo said.
Michael Vrontamitis, Standard Chartered Bank's regional head of transaction banking product management, Northeast Asia, said the relaxation was 'a signal that the market is moving beyond the pilot scheme'.
He said he expected the scheme to be implemented towards the end of the second quarter or early in the second half.
'This is a positive step for banks as we expect more corporates will adopt yuan as the currency for trade settlement,' he said.
The rough share of China's trade that was done in yuan in the third quarter of last year, according to Standard Chartered