China allows Shanghai and four cities in the southern Guangdong province - Shenzhen, Guangzhou, Zhuhai and Dongguan - to settle international trade using RMB on a pilot basis. Detailed measures to regulate the pilot program were released on July 2. This means that the internationalization of the RMB has taken the first step, but still has a long way to go.
First, the pilot program for cross-border trade settled in yuan is a milestone in the process of RMB convertibility under the capital account. China gradually widens RMB’s range of application and lifts its status in the international trading system. Yuan is to go from regional and then international. RMB’s path of becoming a global currency is becoming clearer.
Second, this helps to speed up the economic integration of Chinese Mainland and Hong Kong, and strengthens Hong Kong's role as international financial center. As early as 2004, Hong Kong opened up RMB business to individuals. In 2007 RMB bonds were issued in Hong Kong, and Hong Kong became the first pilot area to issue RMB-denominated bonds outside Chinese Mainland.
At present, only about 60 billion RMB is in circulation in Hong Kong. Hong Kong, having more than a 1.3 trillion HKD annual trade volume with Chinese Mainland, will benefit the most. With cross-border yuan settlement business in Hong Kong banks, and the expansion of this service from individuals to enterprises, RMB business in Hong Kong has entered a new era. Hong Kong is expected to become an offshore yuan hub for RMB flow into Asian countries.
With increased circulation of RMB in Hong Kong, the monetary base of HK is expanding, and will also support asset prices in the stock market, real estate and others in financial markets. In the future yuan financing pilot programs will be possible, making RMB an international financing instrument, and Hong Kong may purchase foreign exchange from the People's Bank of China to provide a new way to use China's foreign exchange reserves.
Third, this will reduce exchange rate risks, benefit enterprises directly and ease the pressure of declining national foreign trade. Pilot enterprises can set a fixed price in trade negotiations to avoid the risk of exchange rate fluctuations and reduce about 1 percent of transaction costs.
At the same time, with the proper channels of the RMB exchange service,Hong Kong enterprises do not need to rely on black-market banking. This will make it easier to safely transfer financial resources and explore the Chinese mainland market.
However, the internationalization of the RMB can not be smoothly accomplished in one action. RMB is still in the initial stage of going abroad. After China starts cross-border trade settled in yuan, the RMB is bound to increase in circulation outside Chinese Mainland. How to protect the stability and orderly cross-border movement of RMB is a new challenge.
In particular, after the gradual expansion of cross-border circulation of RMB, international "financial predators" can take advantage of it. How to guard against financial risks to ensure the stability of China's financial system will become an issue that can not be ignored.
Therefore, it is very important to establish and improve monitoring mechanisms and cooperation of relevant departments including customs, taxation, State Administration of Foreign Exchange (SAFE) and others that are key to success.
In addition, if foreign trade enterprises in China do not have strong bargaining power, willingness and market demand to use RMB that will directly affect the effectiveness of RMB clearing.
China's central bank has respectively signed currency swap agreements with the central bank of South Korea, Malaysia, Belarus, Indonesia, Argentina and other countries as well as the Hong Kong Monetary Authority. This shows that some of China's trading partners recognize the status and stability of the RMB.
In this case, we should continue to actively advocate trading partners to do business in RMB, promote RMB turning into an important trade settlement currency in Hong Kong, ASEAN and other places. China will strive to lift the status of RMB among Asian currencies, gradually make it the dominant currency in the region and then further promote its internationalization.
By People's Daily Online
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