Yuan Watch : Settlement Trials

Dow Jones
BEIJING
December 24, 2008

China's State Council decided Wednesday to begin yuan settlement trials with some regional countries, a move that analysts say will boost regional trade and further liberalize the local currency.

The Cabinet said it will also raise the export-tax rebates on some goods yet again, and expand a government-run fund to support exporters.

The plans, decided at the Cabinet's Standing Committee meeting chaired by Premier Wen Jiabao Wednesday, come after China's exports have been badly hurt by weaker external demand.

One trial will be for trade between two regions in the mainland -- Guangdong province and the Yangtze River Delta -- and Hong Kong and Macau outside the mainland.

The government will also start another trial to allow the yuan to be used as a settlement currency for trade between Yunnan province and Guangxi autonomous region on the one hand, and the Association of Southeast Asian Nations on the other.

The Cabinet said it will also mandate policy banks to expand export buyers' credit, which is a form of credit facility given to the importer. It didn't elaborate.

Wang Qing, an economist with Morgan Stanley, said the yuan settlement trial is "potentially very important," because that will boost regional trade. The global crisis and dollar shortage have caused difficulties for some of China's trade partners to import goods from China, he said.

The yuan settlement trial for neighboring countries is an important first step for China to internationalize the yuan, he said. To carry out the trial, China would need to keep a stable exchange rate between the yuan and the U.S. dollar, Mr. Wang said.

In another move to liberalize China's capital account, China will allow eligible companies in Hong Kong to use the yuan as a settlement currency for trade transactions, Hong Kong Chief Executive Donald Tsang said earlier this month.

Additionally, the Cabinet said it plans to raise export-tax rebates further on some highly value-added machinery and electrical products, but didn't provide a timeframe, list the specific items, or specify the magnitude of the planned increase.

The previous increase in export-tax rebates took effect Dec. 1, when rebates were increased to between 9% and 14% on a range of labor-intensive goods as well as mechanical and electrical products.

The Cabinet also decided Wednesday to "appropriately increase" the size of the country's foreign-trade development fund. It didn't elaborate. In 1996, China set up the fund using part of the revenue from export-quota bidding to help exporters.

According to rules set by the Ministry of Finance, a certain proportion of the fund is used to support exports of machinery and electrical goods. The ministry doesn't regularly disclose the size of the fund it manages.

In the eleven months ended Nov 30, China's exports of machinery and electrical goods totaled $761.3 billion and accounted for 57.8% of the country's total trade during the period.