UPDATE 5-Yuan to spread as Bank of China lets US customers trade RMB

Wed Jan 12, 2011 4:04am EST

* Step to promote more international trade in yuan

* Potential growth of more yuan-trading centres apart from HK

* China's tight hold of yuan supply means deposit growth may be slow

* Banks in Singapore offer yuan trading to customers (Edits)

By Gertrude Chavez-Dreyfuss and Saikat Chatterjee

NEW YORK/HONG KONG, Jan 12 (Reuters) - State-owned Bank of China Ltd has offered yuan trading to its U.S. customers, a sign that Beijing this year may increasingly promote the use of the Chinese currency in major financial centers.

The change at Bank of China announced in a posting dated Dec. 2010 means that customers can trade yuan in the United States for the first time rather than having to do so in Hong Kong.

However, like elswhere, China is keeping a tight rein on the yuan allowed to circulate beyond its borders, so individual accounts can only convert around $3,000 a day into yuan.

The New York branch of China's fourth-largest bank said it now lets companies and individuals buy and sell the yuan via accounts with its U.S. branches, although U.S. businesses and individuals can also trade the currency through Western banks.

"The authorities are promoting the use of the yuan in international trade and this is another step in that direction and this means we should see the growth of yuan trading in other regional centers across the world," said Robert Minikin, senior currency strategist at Standard Chartered Bank in Hong Kong.

The move is seen as another small step to redenominate trade in yuan after persuading mainland importers and exporters to reduce settling trade in the U.S. dollar and striking trade settlement agreements with Russia, Brazil and other countries.

Promoting the use of the Chinese currency in international trade has gone from strength to strength in the past year thanks to a slew of measures taken by authorities.

Cross-border trade settlement in Hong Kong has grown rapidly from a monthly average 4 billion yuan in the first half of 2010 to 68 billion yuan in October.

At the same time, Hong Kong's yuan deposit base has expanded sharply since trade liberalisation rules established in July 2010, leading to the emergence of a rapidly growing offshore yuan and yuan-linked instrument market.

The step by the Bank of China, while significant, is a baby one, mainly because the Chinese government still tightly controls the amount of yuan circulating outside the country and maintains trade settlement quotas.

In 2010, China ran a $181 billion bilateral surplus with the United States, and a total surplus of $183 billion.

Bank of China's website, which outlines details of holding renminbi accounts, said it offers yuan savings, demand and time deposit accounts to business customers in New York and Los Angeles.

A savings account requires a minimum balance of the equivalent of $5,000, while the minimum in demand deposit accounts is $3,000.

The amount of U.S. dollars that can be converted into yuan per individual account is a tiny 20,000 yuan per day ($3,021) -- a cap similar to the one existing in Hong Kong -- and means that the growth in the yuan deposit base would take time.

SMALL STEPS

Yuan deposits in Hong Kong jumped to 280 billion yuan by the end of November from just 63 billion yuan at the end of 2009, and with the likelihood of more trade being settled in yuan in other centers, more pools of liquidity could mushroom.

In Singapore, HSBC has started offering yuan deposits to customers in Singapore with investible assets of more than 200,000 Singapore dollars and DBS will offer yuan deposits to customers soon.

"Every step has been a small step. It is with small steps to a more flexible currency, but at their pace and what they are comfortable with. It is also not a shock that the Chinese did this just when they are meeting with U.S. officials," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.

Chinese President Hu Jintao will visit Washington to meet with President Barack Obama on Jan. 19. China's foreign exchange policy will probably be a topic of discussion [ID:nL3E7CA05U]. ($1=6.619 Chinese Renminbi) (Additional reporting by Julia Haviv in NEW YORK, Kevin Lim and Catherine Trevethan in SINGAPORE, Editing by Kevin Plumberg)