Exclusive: China to step up ASEAN yuan trade settlement

Chinese one yuan coins are placed on 100 yuan banknotes in this illustrative photograph taken in Beijing December 30, 2010.

BEIJING (Reuters) - China plans to sign an agreement with the 10-member Association of South East Asian Nations (ASEAN) to settle trade in yuan, said two independent sources, another step in China's long campaign to make its currency one widely used beyond its borders.

The framework agreement with ASEAN -- which as a block is China's third-biggest trading partner -- will pave the way for banks in China and the ASEAN countries to start exchanging yuan for ASEAN currencies, said the sources, both of whom have direct knowledge of the planned agreement.

"This will lay the foundation for the yuan to become a regional currency," the first source told Reuters, requesting anonymity because he was not authorized to speak to reporters.

China, the world's second-biggest economy, is keen to give the yuan a bigger international role and diversify its foreign exchange reserves -- the world's largest stockpile -- which rose by $4.2 billion in the third quarter to $3.2 trillion.

Once the deal is signed, China would then negotiate individually with ASEAN member countries and sign currency swap agreements, said the sources, allowing non-Chinese companies to settle their yuan-denominated transactions with banks in their own countries, rather than doing so through Hong Kong.

China already has swap agreements with three of the ASEAN countries: Indonesia, Malaysia and Singapore. Thailand could be the next to establish a swap line, one source said.

It was not clear when the China-ASEAN agreement would be signed, but the sources said that the date would likely be late this year or early next year.

The People's Bank of China, or central bank, and the Commerce Ministry, which regulates trade, declined immediate comment when reached by telephone.

MORE YUAN SETTLEMENT

In 2009, China launched a pilot program allowing companies in some provinces to settle imports and exports in yuan, meaning that Chinese companies can in principle use renminbi for their transactions with counterparties in any country.

The program, which was also trialed between ASEAN and Yunnan and Guangxi in south China in 2009, has since been expanded nationwide.

But the latest deal would formalize the arrangement and possibly offer more support to firms and banks in ASEAN countries to conduct commerce in renminbi.

Renminbi, or people's currency, is another name for the yuan.

Since then, yuan-denominated trade has swelled -- it accounted for 8.9 percent, or 957.57 billion yuan, of China's total trade volume in the first half of 2011.

Except for companies in the handful of countries that have swap agreements with China, however, trade must be settled through banks in Hong Kong, adding cost and risk to the transactions.

By setting the stage for more swap deals to be signed, the agreement should mean a steady rise in the use of the yuan around the region.

"China-ASEAN trade will not be settled in yuan overnight. Trade can still be conducted in U.S. dollars. This is just the beginning," said the first source.

The agreement between China and its neighbors could also add momentum to China's effort to promote the renminbi as a global reserve currency. Since China runs a trade deficit with the ASEAN countries, at least some of those countries will accumulate yuan.

"This will mean ASEAN central banks will hold yuan as part of their foreign exchange reserves," the second source said.

China is ASEAN's biggest trading partner. Bilaterial trade rose 26.4 percent in the first nine months of 2011 to $267 billion with an $18.9 billion surplus in favor of the bloc, Chinese customs data shows.

A China-ASEAN Free Trade Agreement came into effect in January 2010. Trade between China and ASEAN nations would grow by 20-30 percent over the next three years, said Wang Rujun, a Chinese economist.

ASEAN, ranging from resource-rich Indonesia to impoverished Laos and financial center Singapore, is planning a union by 2015 to become a single market and production base to compete with rising Asian powerhouses China and India.

Home to 600 million people and a combined GDP of $2 trillion, the region is angling for foreign investment.

China is keen to boost ties with ASEAN economies it relies on for its supply of commodities such as natural gas and crude palm oil to buoy the Chinese economy.

"It makes sense to me because trade settlement within the region is easier to be promoted compared to the internationalization of the yuan," said Zhang Zhiwei, an economist at Nomura.

"Intra-regional trade is picking up as a share of China's trade. It makes sense for policymakers to push for a regionalization of the RMB," the economist said.

(Additional reporting by Kevin Yao; in BEIJING and Saikat Chatterjee in HONG KONG; Editing by Don Durfee and Neil Fullick)