China launches yuan trade settlement scheme

By Lu Jianxin and Jacqueline Wong

SHANGHAI (Reuters) - China has launched a pilot programme to allow companies to settle imports and exports in yuan in some regions, marking a big step towards eventually internationalising the currency.

Six Shanghai companies signed contracts with counterparts in Hong Kong and Indonesia on Monday to be the first to settle business deals in the Chinese currency, also known as the renminbi. Executives said the move would save costs and avert exchange rate risks.

Bank of China (601988.SS)(3988.HK) and Bank of Communications (601328.SS)(3328.HK) were the first to clear transactions in yuan, considered a lucrative business given China's expanding economy and presence in international trade.

Hong Kong also kicked off the long-awaited yuan settlement scheme on Monday, which will widen the territory's role as an offshore yuan centre and test ground for gradual liberalisation of the currency.

HSBC (0005.HK)(HSBA.L) said it completed its first yuan trade settlement with Shanghai and its first cross-border yuan credit transaction.

"Trade settlement in yuan will make it more convenient for both Chinese and foreign firms who conduct China-related exports and imports," said Xu Weimin, chairman of Shanghai Silk Group Co, who sold goods to Hong Kong's China Products Holdings Ltd in one of the contracts signed on Monday.

"It will help both of them save costs," Xu told Reuters on the sidelines of a ceremony to launch yuan settlement. "For Chinese companies, it also has the function to avert exchange rate risks."

Caught off guard and partly lacking the skills to hedge against foreign exchange volatility, many small Chinese exporters have closed shop after China revalued the yuan by 2.1 percent against the dollar in July 2005. The yuan has appreciated by a further 19 percent against the dollar since then.

In announcing the yuan settlement scheme in April, Beijing said it would initially be confined to certain areas, including Hong Kong and Macau, outside mainland China, and to Shanghai and China's key export province of Guangdong in the south.

The scheme would also be trialled between the Association of South East Asian Nations and Yunnan and Guangxi regions in southern China before it is launched elsewhere.

"The scheme should have limited impact on the yuan's value in the initial stage due to official restrictions and because firms need time to get familiar with the procedures," Liu Dongliang, currency analyst at China Merchants Bank in Shenzhen, said.

"But with its expansion in the long run, it will increase pressure for the yuan to appreciate as the yuan's international status strengthens."

FIRST DEALS

Although the total amount in the first batch of deals was small, less than 14 million yuan ($2 million), state media said around 400 Chinese companies had already won approval to conduct yuan business and predicted huge potential.

Bank of China alone had signed contracts with dozens of firms to help settle business in yuan, its president Li Lihui said.