Tuesday, January 11, 2011

Bank of China Brings Yuan Trading to the U.S

Bank of China Brings Yuan Trading to the U.S.

Bank of China Ltd., one of the country's four major state-owned banks, has opened trading in the Chinese currency to customers in the U.S., representing a symbolic endorsement by Beijing of foreign trading in the yuan.

The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment. Analysts say allowing trading in the yuan, also known as the renminbi, is an early step by the Chinese government toward making its currency fully convertible into dollars and other currencies.

"We're preparing for the day when renminbi becomes fully convertible," Li Xiaojing, general manager of Bank of China's New York branch, said in an interview with 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 within China's borders by the country's strict capital controls. Since Beijing opened the currency up to trading in Hong Kong this past July, the market has ballooned.

Bank of China's move is the first by a state-owned institution into yuan trading in the U.S. The move could also alleviate some worries that China may quickly reverse its decision to open up trading.
The decision comes ahead of a 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 significant stamp of approval by China on the expansion in yuan trading. Bank of China, which is 70%-owned by the government and is the country's most international bank, now allows companies and individuals to buy and sell the Chinese currency through accounts with its U.S. branches.

China loosened its yuan controls in a bid to make the currency play a bigger role in global financial markets. The experimental loosening of restrictions was accomplished by establishing a market 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 potentially further open up the currency to trading and possibly attract Chinese companies with offices in the U.S.

Chinese regulators early last month increased the number of exporters that can use 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 of imports could be conducted in yuan rather than U.S. dollars. Today, less than 1% is done in yuan, according to Standard Chartered.

However, despite the explosive growth in offshore yuan trading, the currency only makes up 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 of the developed world.

Meantime, the growth in offshore yuan trading—one of the foreign-exchange industry's most closely watched markets—could slow down due to new regulations on yuan trading announced by the Hong Kong Monetary Authority last month.

Those rules limit the ability of banks in Hong Kong to access yuan through China's foreign-exchange market and to offer currency futures or other derivatives that many have viewed as a source of future revenue growth.
Analysts say the new guidelines reflect China's interest in keeping speculators from taking advantage of the new market to bet on the yuan's movement and potentially cause disruptions to its economy. What Beijing is interested in, analysts say, is measured growth in yuan trading. Some experts also caution that China could still backtrack and slow the growth of the market.

Nevertheless, many have called the emerging yuan trading outside mainland China "a game-changer," as it is a necessary 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 that Beijing sets each day.

Bank of China officials say the bank will take into account both the onshore and the offshore yuan trading when setting the exchange rate of the currency for its customers in the U.S. market.

To trade yuan in the U.S. through Bank of China, a corporation or individual would need to open an yuan account with one of the bank's branches. It has two in New York and one in Los Angeles.

A key obstacle to the growth of the business, at least for now, is a lack of demand for the Chinese currency among American businesses, which by and large still prefer to use 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 discouraged by the exchange-rate risk, experts say, 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. Bank of China'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 more in value.

The yuan's gains against the dollar 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, some observers point out.
In a report issued last week, analysts at research firm Capital Economics projected that the improving outlook for Chinese exporters should make policy makers in China tolerant of "faster currency gains" in 2011.
Write to Lingling Wei at lingling.wei@wsj.com

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