Sunday, 14 December 2008
China and Neighbours Agree to Settle Trades in their Own Currencies
Despite its closed capital account and the lack of easy exchange of its currency, China is working to set up a trade payment system using RMB, and has signed an agreement on free choice of bilateral trade settlement currency with eight neighbouring trading partners.
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China and Neighbours Agree to Settle Trades in their Own Currencies
CSC staff
14 December 2008
Despite its closed capital account and the lack of easy exchange of its currency, China is working to set up a trade payment system using RMB, and has signed an agreement on free choice of bilateral trade settlement currency with eight neighbouring trading partners.
Wu Xiaoling, former vice-governor of the People’s Bank of China, made a statement on promoting RMB to be an international reserve cuarrency at a financial forum in Shanghai in November. She said that China had signed an agreement with eight neighbouring countries, among them Russia, Mongolia, Vietnam, and Burma, according to which signatories have the freedom in to choose the settlement currency in bilateral trade between them.
In a December 5 article for Caijing magazine, Ms. Wu wrote that RMB may become an international reserve currency and spoke of the new settlement agreement. Analysts believe this is a first step for RMB to become an international reserve currency.
“The direct reason for the current financial turmoil is collapse of financial derivatives bubbles and a lack of financial supervision,” Wu wrote. “In depth, this is a process of an issuer of an international currency transferring its domestic crisis led by economic imbalance to the whole world. Without reform of this currency system, other countries can only accept this process. To reform the international currency system, currently we can only reinforce supervision over issuer of the reserve currency. Despite the dire economic situation in the US, we can’t find another currency to replace USD. But in future, countries should have more choices,”
Wu says that to make RMB a reserve currency, China must be prepared in its economic structure and financial system. Although complete RMB convertibility isn’t yet feasible, RMB settlement is used in many deals with neighbouring countries. Because RMB is stable, and the world has confidence in the Chinese economy, many are willing to settle in RMB.
Mei Xinyu, a researcher at the Ministry of Commerce, thinks the 8-neighbour settlement agreement is the first step for RMB to become a reserve currency. “RMB will be more and more widely used. While now it’s used mainly in neighbouring countries, in the future more countries will use RMB.”
Mei thinks it will be good for China’s trade if RMB becomes a reserve currency. “It will reduce exchange rate risk for export companies, and is especially good news for the export of big, high-tech equipment sets, since their manufacture usually takes three to five years, during which the exchange rate may fluctuate sharply.”
However, to make RMB a settlement currency, China still needs to enact supporting policies. Currently the export tax rebate with RMB settlement is only a half of that with foreign currency settlement. RMB settlement should enjoy the same treatment. China also needs to improve its banking system and solve technical problems in the declaration of international payment.
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