China took a new step on Tuesday to promote the yuan beyond its borders, in a strategic initiative aimed to raise the global profile of the currency while retaining capital controls to shield its economy from speculators. China will allow yuan accumulated overseas as a result of trade settlement or central bank swaps to be funnelled back into the mainland's interbank bond market, the People's Bank of China said.
The central bank said the move aimed to boost China's fledgling programme to encourage the use of the yuan in settling trade, thus broadening the international role of the currency. Economists have identified a paucity of investment outlets as one obstacle in the way of a faster build-up of yuan balances under a year-old scheme to invoice and settle imports and exports in yuan, also called the renminbi (RMB), rather than dollars.
"So far, progress has involved allowing renminbi that is already offshore to do whatever is wanted, so long as it doesn't flow back into China. Now it has taken it one step further, and that is to open a small channel that allows some of the offshore yuan to flow back into the mainland system," said Kelvin Lau, an economist with Standard Chartered Bank in Hong Kong. He said the announcement was a small step in the right direction - a natural progression. "This creates more usage for the renminbi in Hong Kong and outside of mainland China, so it is the right step to try to create more usage for the yuan and therefore create more demand for the yuan," he said.
STEP ON THE WAY In a statement on its website, www.pbc.gov.cn, the central bank said three kinds of financial institutions would be permitted to invest surplus yuan in the mainland's interbank bond market:
-- Yuan clearing banks in Hong Kong and Macau;
-- Foreign central banks that have signed yuan swap agreements with China; there are seven to date, totalling just over 800 billion yuan.
-- Overseas banks involved in yuan cross-border trade settlement; the scheme was extended in June to every country in the world and, inside China, to 20 provinces and cities with provincial status.
Tomo Kinoshita, an economist with Nomura in Hong Kong, said the new investment outlet was a natural extension of this scheme by giving foreign banks an incentive to receive yuan deposits. "All things considered, I believe that these measures should help to internationalise the RMB," he said.
"Since the amount of investment in China's bond market is limited to the real demand arising from the trade settlement, these measures will not undermine China's capital controls, which is important from China's international macroeconomic policy point of view," Kinoshita added.
Xing Ziqiang, an economist at China International Capital Corp in Beijing, said the announcement presaged a surge in the volume of trade settled in yuan and could be seen as a step on the long road to a fully convertible currency. "But we still have a long way to go to the final goal," he said. "I would say there is at least more than 5 years before the yuan becomes fully convertible."
Standard Chartered's Lau said the PBOC's move could be seen as a very small opening of the capital account insofar as it allows money to flow into the bond market. "But for the money to leave China in the first place, it is through trade or through swap lines, which is a very managed way," he said.
Comments
Comments are closed.