March 07,2009

China to Launch RMB-Settled Foreign Trade to Address Surplus

By CSC staff, Shanghai

Although China’s exports are falling, its imports are declining more quickly, the monthly trade surplus is still vast, and China’s forex reserve is still swelling. With the gathering fear of long-term USD depreciation, China is working to start settling its foreign trade with RMB, instead of USD.

Zhou Xiaochuan, governor of People’s Bank of China (PBoC), China’s central bank, said recently that a pilot for RMB trade settlement would be launched "before long." Zhou said that now, since banks?information systems are able to conduct settlement in different currencies, it would not be difficult for them to add this function to their system. Zhou also said the banking industry had accumulated rich experience in RMB settlement over years of practice in frontier trade.

The State Council plans to launch a pilot for RMB settlement in commodities trading between Guangdong Province/Yangtze River Delta and Hong Kong/Macao, and between Guangxi Province/ Yunnan Province and ASEAN. According to insiders, PBoC has begun to deal with the issue but hasn’t finalized the decision on pilot banks.  

It is reported, though, that the Bank of Communications and Bank of China (BoC) will become pilot banks for RMB settlement. BoC Governor Li Lihui said his bank was fully prepared for the pilot RMB settlement program and would conduct the business after PBoC launched related policies.  

It is hoped RMB settlement will help to relieve or hedge China’s international trade surplus. There’s no technical obstacle for it, but the question has been whether trade partners are willing to accept RMB.  

China’s forex reserve soared in recent years, and China has bought US national debt with most of it. As China fears the USD will depreciate, sooner or later, holding a large amount of US national debt seems very risky. Buying gold will drive up the already high gold price, and gold is not greatly liquidity. Other currencies can be more dangerous even than gold. So China feels it can only reduce its trade surplus safely through RMB settlement. 

The State Council plans, when conditions are mature, for Shanghai and Guangdong to launch a RMB settlement pilot in the trade with Hong Kong and Macao. If it is successful, the pilot may be expanded to the trade with other neighboring countries. 



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