June 25 (Bloomberg) -- Companies in Beijing, including some of China’s largest trading groups, this week used yuan to settle cross-border trades for the first time, furthering government efforts to reduce the nation’s reliance on the U.S. dollar.
Subsidiaries of Sinochem Group, China’s biggest chemicals trader, and China Minmetals Corp., the largest metals trader, were among the first to pay a total 24.24 million yuan ($3.6 million) to Hong Kong and Macau suppliers via Beijing-based China Citic Bank Co., the lender said in an e-mailed statement yesterday. Nokia’s Oyj’s China unit also opted to pay yuan after a program allowing trade settlement in the currency was expanded.
“Beijing has an abundance of big state-backed companies that want to pay for imported goods and services in yuan to reduce foreign-exchange risks and transaction costs,” said Zhang Lijun, assistant general manager at the operation and business department of Citic, the banking unit of the nation’s largest investment company. “We expect the market for local- currency settlement to grow quickly.”
The use of yuan for trade settlement has been expanded to a total 20 provinces and cities, the People’s Bank of China said June 22, almost a year after such payments were approved for five cities. Trade settlement using the yuan totaled 18.4 billion yuan ($2.7 billion) in the first quarter, five times more than the amount in the second half of 2009, the central bank said on May 10.
Dollar Risk
China is seeking alternatives to the dollar as U.S. President Barack Obama boosts spending to revive the economy and lower unemployment following the deepest recession since the 1930s, a policy that’s forecast to widen the budget deficit to a record $1.6 trillion this year. The Asian nation has foreign- exchange reserves totaling $2.45 trillion, the world’s largest, and Premier Wen Jiabao in March said he is “worried” about holdings of assets denominated in the greenback.
China on June 19 scrapped the yuan’s two-year peg to the dollar, a measure aimed at deflecting criticism from its trading partners. The currency has strengthened 0.5 percent this week to 6.793 per dollar and forward contracts reflect bets for 1.6 percent appreciation in the coming 12 months.
“Expectations for the yuan to rise may help spur business demand for using yuan in trade in the short term,” said Liu Xin, an analyst at the Hong Kong branch of Bank of Communications Ltd., China’s fifth-biggest lender. “In the long run, however, the yuan’s internationalization pace will be limited if China won’t open its capital account for investments.”
--Editors: James Regan, Sandy Hendry
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To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
From Bloomberg BusinessWeek Published on June 25, 2010, 12:24 AM EDT