China will allow the yuan to be traded against a wider variety of currencies in the onshore foreign exchange market, the central bank said in a report on Friday. The People's Bank of China (PBOC) did not name any of the new currency pairs that will be launched for trading, though the announcement signalled a determination to continue pushing the Chinese currency towards a larger role in settling international trade.
The yuan is currently tradable against seven currencies: the US dollar, the euro, the yen, the Hong Kong dollar, sterling, the Malaysian ringgit and the Russian rouble. "Relevant departments will look at bilateral economic and trade relations as well as financial interactions to launch trading of yuan and other currencies in the interbank market," the central bank said in a report reviewing financial market developments in 2010.
"When they announced it with Malaysian (ringgit), it didn't really affect the Malaysian ringgit, so it's not something that is going to move the domestic market, but it is more on the idea of letting the yuan be traded more broadly against everything else," said Wee-Khoon Chong, an foreign exchange strategist at Societe Generale in Hong Kong. A foreign exchange trader in Shanghai said the market should not get ahead of itself in its expectations for yuan internationalisation.
Beijing says that the yuan's exchange rate is managed according to a currency basket, but in practice it keeps the currency on a crawling peg against the dollar. Increasing the number of currencies traded against the yuan will gradually help reduce the dollar's weight in determining the value of the yuan, traders said. Most China-based traders believe that the dollar accounts for about 70 percent of the Chinese nominal effective exchange rate (NEER), or its value against a trade-weighted grouping of currencies.
Among other steps to promote the yuan's use on a regional and global basis, China has launched a programme to use the yuan for settlement of exports and imports. It has also allowed the development of a nascent offshore yuan market in Hong Kong. In the report published on Friday, the central bank said that it would accelerate the opening of its domestic bond market to foreign institutions.
The central bank also noted that the demand for yuan assets was on the rise in overseas markets as Beijing expands the use of the currency for trade and even investment purposes. Last August, the central bank launched a new programme allowing yuan accumulated overseas as a result of trade settlement or central bank swaps to be funnelled back into the mainland's interbank bond market.