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Experts see bright outlook for Chinese yuan

Publication Date : 30-04-2012


Experts are upbeat on the outlook for the yuan in the years to come in terms of volume of transactions in global foreign-exchange markets and the unit's prospects as a reserve currency after the Chinese authorities' decision on April 15 to widen the currency's trading band.

At the Asian Banker Summit 2012 in Bangkok last week, Li Shu Pui, head of financial markets development at the Hong Kong Monetary Authority (HKMA), told a panel entitled "Developing Yuan Liberalisation: The Rules Are Changing" that only 10 per cent of China's trade is denominated in its own currency. This compares to some 35 per cent in Japan, about 50-60 per cent in the euro zone and 80-90 per cent in the United States.

Meanwhile, yuan liquidity is on the rise, mostly through demand in the swap market. Transactions now are expensive, due to tight liquidity. The HKMA is developing a platform to allow cross-border transactions. "There are two angles to look at here, trade volume [in yuan] and liquidity," Li said.

In its bid to internationalise the currency, the People's Bank of China widened the trading band of the yuan against the US dollar from 0.5 per cent to 1 per cent. This followed a directive announced last August in China that all parts of the country are able to use its national currency in cross-border trade settlements. Boosting cross-border use of the yuan is a stated goal of the country's 12th Five-Year Plan (2011-2015). This internationalisation is in line with the global trend, as the dollar - which dominates half of global reserves - is losing its shine, while the second-largest reserve currency, the euro, is in trouble.

According to Peter Zhang, deputy director-general of the China Banking Regulatory Commission's Shanghai office, the greater use of the yuan is promising and reflects the growing level of yuan-denominated bond issuance and volume in the global foreign-exchange markets.

In 2011, offshore yuan-denominated issuance reached 107.9 billion yuan, a sizeable increase compared to 16 billion yuan in 2009 and 36 billion yuan in 2010.

In the global foreign-exchange trade, the yuan was ranked 20th in 2011, unchanged from 2007. Based on China's economic growth, Zhang envisions the currency's ranking will move to between fifth and 10th by 2020.

"The wider band is very, very positive. Yuan transactions in the FX markets would be much more active from this year on," he told the audience.

To Thierry de Longuemar, vice president for finance and administration at Asian Development Bank, the outlook is bright for the yuan to become convertible. "Once the yuan is convertible, we'll have a new reserve currency. That would be revolutionary."

The rise of the yuan will certainly benefit Hong Kong, where 80 per cent of yuan-denominated transactions are cleared, according to Patrick de Courcy, head of markets, Asia Pacific, at SWIFT. The infrastructure is there to accommodate greater transactions. Still, it is too soon to say if Hong Kong would be the next financial centre, after London, he said. To be a financial centre, the city must be a true centre for a number of businesses, such as insurance and FX transactions, he noted.


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