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WTO story: RMB globalization, step by step

12-08-2011 11:30 BJT Special Report:China’s Ten Years in WTO |

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Over the past decade, China has stepped up efforts to open its capital markets. Part of that, is paving the way for the widespread international use of its currency, the RMB. Some world leaders have called for faster globalization of the yuan, as they hope strong economic growth in China can help pull the developed world out of the current financial slump. The question is, is China ready to take on the challenge?

Jinchuang is a company that produces and exports gas meters. Business has been booming, until the appreciation of the Chinese yuan against the U.S. dollar pushed up the company’s exchange losses by a big margin.

Zheng Jiansheng, chairman of Beijing Jinchuang Combined Gas Meter Company Ltd. said: "For example, the rate of the U.S. dollar has gone down by around 35 percent against the yuan from six years ago. But we couldn’t negotiate a price rise with our clients in Tajikistan, because their local currency has risen 20 percent against the dollar. This is a dilemma. For importers, their costs are higher. For us exporters, our profits have shrunk. We’re truly facing a hard time."

Mr. Zheng says he hopes they could use other currencies to settle deals, to shield away from the huge fluctuations of the dollar. And he is not alone. Tens of thousands of Chinese exporters, who are accustomed to using the U.S. dollar in business settlement, are feeling the same pinch.

Since China’s accession to the WTO, the country has stepped up the pace in expanding the use of RMB for trade and investment in order to reduce reliance on the U.S. dollar.

In recent years, the government announced it would allow RMB settlement for specific cross-border trading activities in several coastal cities on a pilot basis. China has broadened its experiment to build an RMB financial system in Hong Kong. The central bank also signed bilateral currency swap agreements with central banks in a number of foreign countries. And the efforts are paying off gradually.

In a most recent move to simplify trade settlements with more countries, RMB has begun trading against the Australian dollar and Canadian dollar in the onshore foreign exchange market, as of the end of November. This brings the number of foreign currencies that can participate in interbank trade against the RMB to nine. That’s certainly good news for this company, which imports wine from Australia.

As businesses hail the globalization of the RMB, so does the international community. At the November G20 summit in France, global leaders called for the inclusion of the RMB in the special drawing rights - a supplementary foreign exchange reserve assets defined by the IMF that brings together several currencies, that are tradable and used in international trade on a regular basis.

But Chinese economists are less enthusiastic. They say the high expectations from developed nations are based on China’s rapid economic growth over the years. International confidence in China is at an exceptionally high level, especially at a time when the U.S. and Europe remain mired in financial crisis. But analysts argue - strong economic growth alone is not enough, and what China needs is to upgrade and improve its financial system.

Tan Yaling, president of China Forex Investment Research Institute said: "The outlook for yuan globalization is positive, but the path may not be easy, especially under the current volatile global environment. The globalization process of the yuan should come along with China’s reform in finance industry to make it healthier. This requires sufficient professionalism, quality and a sound management system in the finance industry, which takes time to build."

Tan adds, the government would have to loosen its control on foreign exchange if the yuan becomes fully convertible one day. And without the sound finance system, this can lead to high risks.

Tan Yaling said: "An immediate risk the yuan would face is quick depreciation, after fast appreciation. Will this hurt market sentiment? How can China and the world handle this?"

Analysts say yuan internationalization cannot be rushed, as China’s financial industry and Chinese investors need time to consolidate growth and develop better industry practices. But they’re optimistic - the day will come when companies can quote RMB prices, for a significant part of their transactions.

 

Editor:Zhang Rui |Source: CNTV.CN

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