Yuan Settlement: Widespread Adoption Unlikely in Short Term

The limited number of eligible suppliers and impractical policies are making it difficult for yuan trade settlement to become a viable option in China’s export manufacturing industry.

More than a year after the yuan trade settlement pilot program was launched, and very few China suppliers are quoting prices in the local currency.

Both manufacturers and buyers are willing to settle payments in the yuan. On the part of the makers, doing so eliminates currency exchange losses whenever the yuan gains against the US dollar. For clients, this means export quotes will remain stable, regardless of how fast the yuan appreciates.

But current policies make it impractical for both sides to do so. Most companies in China export to buyers in the US and the EU, where the yuan is not widely circulated. They cannot see how their customers, who are already used to dealing in US dollars, would be willing to switch to the yuan when it may not always be available in their home countries. It is often clients from South and Southeast Asia who are willing to transact in the yuan, but the majority of China manufacturers have few customers from those regions.

Mike Bellamy, general manager of PassageMaker and board member of the China Sourcing Information Center, said there could be more buyers using the yuan in transactions if individuals and not only corporations could open a yuan account in their home countries. It would also help if conversion fees are not too high.

Further, HSBC’s chief economist for China Hongbin Qu said more measures are needed in the months ahead to facilitate offshore yuan investment. Among these are speeding up development of offshore yuan products, including a deliverable forwards market in Hong Kong and a mini-QFII scheme. Unlike the full version of the qualified foreign institutional investors program, the mini-QFII allows fund managers in Hong Kong to invest overseas yuan deposits in stock markets in mainland China.

Qu believes China also needs to implement more liberal policies, including opening the domestic market further to widen the access for foreigners investing in the yuan. Such depositors should be able to transfer funds from yuan accounts in their home countries.

US dollar continues to dominate transactions

To widen the opportunities for yuan settlement, the China government expanded coverage in June 2010 to include at least 1,000 companies in 20 provinces, and opened it to all countries worldwide, instead of limiting it to ASEAN members. Suppliers were chosen based on their export scale, credit record and years of experience.

Despite this move, most eligible exporters still do not settle transactions in the yuan. Consumer electronics maker Konka Group Co. Ltd has few customers in Southeast Asia. International business division president Dong Chang believes it would be hard to convince buyers outside of the region to pay in the yuan.

Timely Electronics Ltd’s managing director Albert Mak said the company asked its buyers if they are willing to transact in the yuan as early as August 2009, when it was included in the pilot program. But none of the mobile phone supplier’s clients, many of whom are based in Africa and South America, have been willing to do so. Timely’s buyers are more willing to accept higher quotes in US dollars. They believe the conversion rate of the yuan against other currencies is affected significantly by government policies, making it difficult to project how much the yuan will appreciate over a period of time.

Statistics covering 12 months to June 2010 show that of the total yuan settlements recorded in the period, only 9 percent or 1.98 billion came from the export industry. Some of the successes from other sectors include telecommunications company ZTE, which was the first in Shenzhen, Guangdong province, to receive yuan remittances from Hong Kong via the Bank of China.

HSBC also completed its first UK cross-border yuan trade settlement transaction, a month after the program’s coverage was expanded.