New Move to Make Yuan a Global Currency

New Move to Make Yuan a Global Currency

BY: TWSJ

January 12, 2011

China has launched trading in its currency in the U.S. f0rthe first time, an explicit endorsement by Beijing 0f the fast-growing market in the yuan , a significant step in the country's plan to foster global trading in its currency.

The state-controlled Bank 0f China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S., expanding the nascent offshore market f0rthe currency which began last year in Hong Kong.

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The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used f0rtrade , investment.

"We're preparing f0rthe day when renminbi becomes fully convertible," Li Xiaojing, general manager 0f Bank 0f China's New York branch, told The Wall Street Journal. He said the bank's goal is to become "the renminbi clearing center in America."

Until the middle 0f last year, the buying , selling 0f yuan had largely been confined to mainl, China by the country's strict capital controls. But in July, it opened the currency to trading in Hong Kong. Daily trading has since ballooned from zero to $400 million.

Bank 0f China's move comes at a time 0f U.S. pressure on China to let its currency rise in value. America has blamed an unfairly valued yuan f0rexacerbating the U.S. trade deficit with China. But the preparations f0rconvertibility are also a sign 0f Chinese strength, as China, now the world's second-largest national economy, recognizes that as a global power it must have a global currency. In time, a globally traded yuan could emerge as a store 0f value on par with the dollar, euro , yen.

The decision comes ahead 0f next week's visit to Washington by Chinese President Hu Jintao, when China's exchange-rate policies are expected to once again be in the spotlight.

While businesses , individuals in the U.S. can already trade yuan through Western banks such as HSBC Holdings PLC, the move by a Chinese-owned bank marks a stamp 0f approval by China on the expansion in yuan trading. Bank 0f China, which is 70%-owned by the government, now allows companies , individuals to buy , sell the Chinese currency through accounts with its U.S. branches.

Bank 0f China limits the amount 0f yuan that can be converted by a U.S.-based individual customer to up to $4,000 a day. The restriction is designed to fend off speculation in the currency, bank officials say. But there is notlimit, at least f0rnow, on the amount that can be converted by businesses, so long as they are engaged in international trading. The bank has notrestrictions on the ability by U.S.-based customers to convert the yuan back into dollars.

The loosening 0f restrictions on trading yuan started in Hong Kong, a former British colony under Chinese sovereignty but with its own legal , financial systems. Anyone with a Hong Kong yuan account is now able to trade the currency. Bank 0f China's move could further open up the currency to trading , attract Chinese companies with offices in the U.S.

Going Global

Bank 0f China's move to open trading 0f the yuan in the U.S. underscores Beijing's growing openness to currency liberalization.

"This is making yuan more accessible to individuals , corporations," says Robert Sinche, global head 0f foreign-exchange strategy at RBS Securities in Stamford, Conn. "But China has a long way to go before it has a fully convertible currency, , this is an inching step forward."

Chinese regulators last month increased the number 0f exporters that can use the yuan to settle international transactions from a few hundred to nearly 70,000. Some analysts have predicted that it will be only a few years before 20% to 30% 0f China's $2.3 trillion in imports could be conducted in yuan rather than dollars. Today, less than 1% is done in yuan, according to London's Standard Chartered Bank. While offshore yuan trading has grown rapidly, it's still a fraction 0f the $4 trillion daily trading in currency markets world-wide , pales next to trading in the dollar, yen, euro , other currencies.

Some skeptics say growth could be curtailed by new regulations announced by the Hong Kong Monetary Authority last month, which puts restrictions on banks' ability to offer yuan-related products in Hong Kong. Analysts say the regulations reflect China's interest in keeping speculators from betting on the yuan's movement , potentially causing disruptions to its economy.

What Beijing is interested in, analysts say, is measured growth in yuan trading. Some experts caution that China could still back track. Nevertheless, some industry observers have called yuan trading outside mainl, China a game-changer, as it is one step in allowing the yuan to ultimately float freely. F0rnow, the offshore market acts as a parallel market , doesn't affect the official rate f0rthe yuan set by Beijing.

Bank 0f China officials say the bank will take into account both the onshore , the offshore yuan trading when setting the exchange rate 0f the currency f0rits customers in the U.S.. To trade yuan in the U.S. through Bank 0f China, a corporation 0rindividual would need to open a yuan account with one 0f the bank's branches in New York 0rLos Angeles.

An obstacle to the growth 0f the business, at least f0rnow, is a lack 0f dem, f0rthe currency among American businesses, which by , large still use the dollar to settle cross-border transactions. McDonald's Corp. , Caterpillar Inc. recently became the first U.S. non-financial companies to sell debt priced in yuan in Hong Kong.

Potential users 0f the yuan could be attracted to what some might see as a sure bet, since China has said it will continue to allow its currency to appreciate. However, there's still risk given the uncertainty over the pace 0f appreciation 0f the currency. Also, banks tend to charge relatively high service fees on yuan accounts.

Mr. Li said the yuan business is "one 0f the top priorities" f0rBank 0f China's U.S. operations. "We see bright future f0rthe business," he said. The bank's Hong Kong subsidiary has been the sole clearing bank 0f renminbi banking business in Hong Kong f0rthe past seven years.

The yuan strengthened 3.3% against the dollar last year, as Beijing loosened its peg to the dollar during the summer amid increasing pressures from the U.S. , other trading partners to let its currency appreciate. The yuan's gains stalled after the Group 0f 20 meeting 0f the world maj0reconomies in November but have resumed as President Hu's visit to the U.S. approaches.

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