Three Shanghai firms agreed to settle import and export contracts in yuan for the first time, as China seeks to reduce the role of the dollar in global trade.
Shanghai Silk Group, Shanghai Electric Group and Shanghai Huanyu Import & Export signed contracts worth 14 million yuan ($2 million) with customers in Hong Kong and Indonesia, Fang Xinghai, director general of the municipal government’s financial services office, said at a press conference yesterday. Bank of Communications and Bank of China offered transaction services.
China, Russia and India have said the world economy is too reliant on the dollar and called for changes in how $6.5 trillion in foreign-exchange reserves are managed, before Group of Eight leaders meet this week. The settlement program and sales of yuan-denominated debt overseas are designed to make the currency more attractive for central banks to hold.
"This is a first step on the long road towards that target of making the yuan a global reserve currency," said Nizam İdris, a strategist in Singapore at UBS. "That’s probably going to take five years or more."
The central bank on July 2 allowed companies in Shanghai and four cities in the southern Guangdong province to settle trade in yuan with businesses in Hong Kong, Macau and Association of Southeast Asian Nations. Outside of special border trade zones, companies previously had to convert yuan into dollars or other currencies to settle international trade. "The yuan settlement program will help boost bilateral trade with Hong Kong and Asean nations," People’s Bank of China Deputy Governor Su Ning said at the signing ceremony. "A stable yuan will help companies control exchange-rate risks." The yuan has strengthened 21 percent against the U.S. currency since a dollar peg was scrapped in 2005.
Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, said in a July 3 interview that he is urging his nation to diversify its foreign holdings away from the dollar. Russian President Dmitry Medvedev said in an interview with Corriere della Sera that the dollar system is "flawed."
"More and more companies will choose yuan to settle international trade as China’s economy gets stronger and its financial market plays a more important role in the world," Li Lihui, President of Bank of China, told reporters Monday. "It’s an unavoidable trend." The challenge to the dollar, a linchpin of world finance and trade since 1945, underlines the shift in relative economic power toward emerging markets and away from the developed nations that spawned the global crisis. French Finance Minister Christine Lagarde, speaking Sunday at a conference in Aix en Provence, France, said that "we must explore better coordination of exchange-rate policy."
For all the concerns about the dollar’s role, emerging markets such as China and India remain dependent on the currency. The International Monetary Fund said June 30 the share of dollars in allocated global foreign-exchange reserves increased to 65 percent, or $2.6 trillion, in the first three months of this year, the highest since 2007.
The dollar will maintain its role for "many years to come," China’s Deputy Foreign Minister He Yafei told reporters in Rome Sunday.
Participation in China’s yuan settlement program will be limited to companies with good credit, the People’s Bank’s Su said.
Separately, the Bank of China signed clearing agreements for yuan settlement in Shanghai with 11 overseas banks, including Standard Chartered, Bank of East Asia and PT Bank Mandiri.
"It’s an important first step," said Chris Teunissen, general manager at the Hong Kong branch of PT Bank Mandiri, Indonesia’s largest financial-services company, in an interview. "Indonesian firms will read about the signing ceremony and approach us."
HSBC Holdings said in a statement it became the first foreign bank to settle cross-border trade in the currency. HSBC and Bank of Communications, known as BoCom, plan to work together to help Chinese exporters expand their international trade and cut foreign-exchange risk.