New Move to Make Yuan a Global Currency
By LINGLING WEI
A Chinese clerk counts yuan next to U.S. dollars.
The state-controlled Bank of China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S., expanding the nascent offshore market for the currency which began last year in Hong Kong
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"We're preparing for the day when renminbi becomes fully convertible," Li Xiaojing, general manager of Bank of China's New York branch, told The Wall Street Journal. He said the bank's goal is to become "the renminbi clearing center in America."
Until the middle of last year, the buying and selling of yuan had largely been confined to mainland China by the country's strict capital controls. But in July, it opened the currency to trading in Hong Kong. Daily trading has since ballooned from zero to $400 million.
Bank of China's move comes at a time of U.S. pressure on China to let its currency rise in value. America has blamed an unfairly valued yuan for exacerbating the U.S. trade deficit with China. But the preparations for convertibility are also a sign of Chinese strength, as China, now the world's second-largest national economy, recognizes that as a global power it must have a global currency. In time, a globally traded yuan could emerge as a store of value on par with the dollar, euro and yen.
The decision comes ahead of next week's visit to Washington by Chinese President Hu Jintao, when China's exchange-rate policies are expected to once again be in the spotlight.
While businesses and individuals in the U.S. can already trade yuan through Western banks such as HSBC Holdings PLC, the move by a Chinese-owned bank marks a stamp of approval by China on the expansion in yuan trading. Bank of China, which is 70%-owned by the government, now allows companies and individuals to buy and sell the Chinese currency through accounts with its U.S. branches.
Bank of China limits the amount of yuan that can be converted by a U.S.-based individual customer to up to $4,000 a day. The restriction is designed to fend off speculation in the currency, bank officials say. But there is no limit, at least for now, on the amount that can be converted by businesses, so long as they are engaged in international trading. The bank has no restrictions on the ability by U.S.-based customers to convert the yuan back into dollars.
The loosening of restrictions on trading yuan started in Hong Kong, a former British colony under Chinese sovereignty but with its own legal and financial systems. Anyone with a Hong Kong yuan account is now able to trade the currency. Bank of China's move could further open up the currency to trading and attract Chinese companies with offices in the U.S.
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"This is making yuan more accessible to individuals and corporations," says Robert Sinche, global head of foreign-exchange strategy at RBS Securities in Stamford, Conn. "But China has a long way to go before it has a fully convertible currency, and this is an inching step forward."
Chinese regulators last month increased the number of exporters that can use the yuan to settle international transactions from a few hundred to nearly 70,000. Some analysts have predicted that it will be only a few years before 20% to 30% of China's $2.3 trillion in imports could be conducted in yuan rather than dollars. Today, less than 1% is done in yuan, according to London's Standard Chartered Bank. While offshore yuan trading has grown rapidly, it's still a fraction of the $4 trillion daily trading in currency markets world-wide and pales next to trading in the dollar, yen, euro and other currencies.
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Bloomberg News
A pedestrian walks past a branch of the Bank of China in Beijing.
What Beijing is interested in, analysts say, is measured growth in yuan trading. Some experts caution that China could still back track. Nevertheless, some industry observers have called yuan trading outside mainland China a game-changer, as it is one step in allowing the yuan to ultimately float freely. For now, the offshore market acts as a parallel market and doesn't affect the official rate for the yuan set by Beijing.
An obstacle to the growth of the business, at least for now, is a lack of demand for the currency among American businesses, which by and large still use the dollar to settle cross-border transactions. McDonald's Corp. and Caterpillar Inc. recently became the first U.S. non-financial companies to sell debt priced in yuan in Hong Kong.
Potential users of the yuan could be attracted to what some might see as a sure bet, since China has said it will continue to allow its currency to appreciate. However, there's still risk given the uncertainty over the pace of appreciation of the currency. Also, banks tend to charge relatively high service fees on yuan accounts.
Mr. Li said the yuan business is "one of the top priorities" for Bank of China's U.S. operations. "We see bright future for the business," he said. The bank's Hong Kong subsidiary has been the sole clearing bank of renminbi banking business in Hong Kong for the past seven years.
The yuan strengthened 3.3% against the dollar last year, as Beijing loosened its peg to the dollar during the summer amid increasing pressures from the U.S. and other trading partners to let its currency appreciate. The yuan's gains stalled after the Group of 20 meeting of the world major economies in November but have resumed as President Hu's visit to the U.S. approaches.
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