CDB set to sign memorandum on yuan loans to its four BRICS counterparts

PUBLISHED : Monday, 19 March, 2012, 12:00am
UPDATED : Monday, 19 March, 2012, 12:00am


China Development Bank (CDB) will sign a memorandum of understanding (MoU) with Brazilian, Russian, Indian and South African counterparts to make yuan loans available to them, in a major move to boost the currency's international status, according to two bank staff.

Corporate borrowing in yuan from Hong Kong banks has already picked up in recent months after the currency's appreciation slowed, with Beijing announcing a series of measures to help invest yuan accumulated offshore back on the mainland.

The plan to promote yuan loans among BRICS nations would take the internationalisation of the currency to the next stage, economists said.

'It's a high-profile move to further open up China's capital account, as the country is now promoting usage of yuan loans outside Hong Kong,' said Raymond Yeung, an economist at ANZ bank.

China has so far mostly promoted the yuan as a settlement currency with trade partners such as in Latin America, said Yeung. CDB's expected MoU, however, did not mean the yuan would replace the US dollar or become a main reserve currency overnight, he said.

Gonzalo Torano, BBVA's Asia-Pacific head, said that while CDB might wish to facilitate more yuan loans to BRICS, the currency might not be the most favourable for borrowers as it has been relatively strong.

'The problem is, if you are a BRICS country and you get debt in yuan and you get your income in local currency, which might not be so strong, then this will not be a good solution,' said Torano.

But others believe that as the yuan's appreciation slows, this might open a window of opportunity.

Central bank governor Zhou Xiaochuan said last week that the yuan was getting closer to fair value against foreign currencies, rejecting international calls for Beijing to accelerate the yuan's appreciation.

Nathan Chow, an economist at DBS, said that after the financial crisis, most countries cut down on their US dollar assets and the yuan had become a good option as trade with China increased.

'It's a good time to promote yuan loans because yuan appreciation is slowing down,' making it less costly to borrow in the currency, he said.

In October, the People's Bank of China announced a rule change allowing foreign investors to use offshore yuan funds to make direct investments in China.

Since then, an increasing number of companies have asked banks to arrange yuan loans or underwrite yuan bond issues to raise funds to finance their Chinese projects.

CDB is expected to sign the MoU in New Delhi on March 29.