Chinese Yuan Seeks Further Internationalization and Less Reliance on U.S. Dollar

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Dec. 9 – Faced with increasing pressure on faster currency appreciation and a possible domestic export recession under the “quantitative easing” by the U.S. Federal Reserve, the Chinese government is looking to reduce the yuan’s reliance on U.S. dollars by promoting its international stance and modifying the country’s foreign exchange asset structure.

In order to strengthen the yuan’s position on international financial markets, China has been pushing forward the yuan-based cross-border settlement practice since 2009, when China released concrete regulations on the administration of trial locations for such practices. On June 22 this year, People’s Bank of China (PBC) announced China would enlarge the coverage of the trial locations to 20 provinces, autonomous regions and municipalities.

Recently, China’s Ministry of Finance (MoF) proclaimed on its web site that 67,359 enterprises – jointly validated by PBC, MoF, Ministry of Commerce, General Administration of Customs, State Administration of Taxation and Banking Regulatory of Commission – have qualified for trials to conduct yuan-based cross-border settlements from December 3. These enterprises can simultaneously benefit from tax exemption or rebate on their goods for export.

In addition to China’s efforts on the increasing international yuan-based settlement, the country also shows a strong interest in the release of yuan-denominated financial products in international markets, especially by using the Hong Kong market as a window to global investors. Not only did the Ministry of Finance just announce the imminent issuance of RMB8 billion in yuan-denominated bonds in the Hong Kong market, but the Hong Kong Monetary Authority Chief Executive Norman Chan even told the media that the Chinese government is working on plans to allow mainland companies to issue yuan bonds in Hong Kong and issue permits to Hong Kong insurers to invest in the mainland’s interbank bond market.

A report on China Business News mentioning China’s promotion of Hong Kong as an offshore yuan market already encouraged some major foreign companies to issue yuan-denominated bonds in Hong Kong. McDonald’s Corp. this year issued RMB200 million of bonds in Hong Kong, and U.S. heavy equipment-maker Caterpillar Inc. just announced an issuance of RMB1 billion of bonds in the near future.

As the largest U.S. bond holder, in order to reduce its dependence on U.S. treasuries, China is also looking to expand its holdings of financial products denominated in other currencies with higher rates of return. According to the latest report on China Business News, the increase in China’s South Korean treasury bond (KTB) holdings peaked in November, with the monthly net purchase amounting to KRW556 billion (US$490 million), which is a 27 percent growth from a month earlier. An index compiled by HSBC reported an 8.5 percent profit return rate in KTBs this year, higher than the 7.8 percent return rate of U.S. Treasuries reported by Bank of America Merrill Lynch’s Treasury Master Index.

Christian Carrillo, head of the Asia-Pacific Interest Rate Strategy Department of Societe Generale commented that “Chinese authorities have every incentive to diversify their reserves, and the KTBs are a good avenue for this.”

An official with Russia’s central bank also said that China intends to boost ruble-based trade of some commodities including timber, coking coal and seafood with Russia, for the purpose of boosting bilateral trade between the two countries while at the same time reducing its reliance on U.S. dollars.