“It will reduce foreign-exchange risks for companies, create more business for Hong Kong banks and diversify use of yuan funds,” Tsang said at a press briefing in the city. “The policy has already been approved. It’s almost here.”
China is seeking to promote the yuan as an international currency after signing 650 billion yuan ($95 billion) in swap agreements with Hong Kong, Argentina, Indonesia, South Korea, Malaysia and Belarus in the past four months. The yuan has gained 21 percent against the dollar since its fixed exchange rate was scrapped in 2005, eroding the value of China’s central bank reserves and exporters’ profits.
“These are baby steps toward liberalization of China’s capital account and internationalization of the renminbi,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “Access to renminbi is not going to be an issue. China is using its financial might to hedge any risk it might face in terms of supplies of central raw materials for its growth and demand in other markets for its products.”
China’s State Council said yesterday it allowed yuan settlement for international trade in Shanghai and four cities in Guangdong province to promote global use of the currency and protect companies from swings in the dollar. The cabinet will release related regulations “as early as possible,” it said in a statement on its Web site.
Hong Kong
While China allowed the currency to be used for trading goods and services in December 1996, it had to be converted before cross-border payments were made. Hong Kong banks have been able to accept yuan deposits since 2004 and stores have increasingly welcomed payment in China’s currency since 2003, when a relaxation of visa controls led to a surge of mainlanders visiting the city.
Hong Kong has pegged its dollar to the U.S. currency since 1983 and allows it to trade 5 cents on either side of HK$7.80 per dollar. It was at HK$7.7507 as of 12:08 p.m. local time. When asked how the program would affect the link, Tsang signaled his support for the exchange-rate system.
‘An Anchor’
“Hong Kong’s U.S. dollar peg is an anchor to Hong Kong’s financial stability,” Tsang said today.
The four other Chinese cities permitted in the program are Guangzhou, Shenzhen, Zhuhai and Dongguan. The statement didn’t say with which countries the five cities will settle trade with. There is no upper limit for yuan settlements in Hong Kong, said K.C. Chan, the Secretary for Financial Services and the Treasury, in a Radio Television Hong Kong report.
“In the endgame, we know it’s going to be one country, one currency,” said ING’s Condon. “The Hong Kong dollar will go the way of the Macanese pataca in time, but that can be 15 years away. It’ll be a series of these baby steps.”
The pataca is the official currency of Macau, even though most of the money in circulation in the former Portuguese territory is Hong Kong dollars.
The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, has fallen 16 percent this decade and plunged 2.9 percent last month, the worst performance this year, on concern Federal Reserve purchases of Treasuries will boost the supply of the greenback.
The yuan was little changed at 6.8354 per dollar, according to China Foreign Exchange Trade System. The government has allowed it to decline 0.2 percent this year against the U.S. currency as manufacturers complained its appreciation has eroded the value of their overseas income. Exports tumbled a record 25.7 percent in February, narrowing its trade surplus to $4.8 billion, the smallest in three years.
