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China launches pilot program for trade settlements in yuan

CHINA yesterday officially kicked off a pilot project to let companies settle trade in the yuan in an essential step toward enhancing the status of the Chinese currency and shoring up exports to boost the economy.

Three Shanghai-based firms became the pioneers in using the yuan to settle cross-border trade by signing contracts worth more than 14 million yuan (US$2.05 million) with companies in Hong Kong and Indonesia.

The program's launch in Shanghai reflected the central government's determination to build the city into a global financial hub by 2020 through pressing ahead with a series of financial innovations and market reforms.

"The yuan-settlement trial in Shanghai has great significance for the city's plan to become an international financial center," Shanghai Mayor Han Zheng said at the signing ceremony. "The program will also benefit cities in the Yangtze River Delta region with sustained and healthy trade growth."

China last Thursday issued rules to permit companies in Shanghai and four cities in the Guangdong Province to settle trade in yuan with businesses in Hong Kong, Macau and the 10-member Association of Southeast Asian Nations.

Previously, Chinese companies had to convert yuan into US dollars or other currencies to settle international trade.

But as the dollar and euro have been fluctuating so wildly since the onset of the global financial crisis, regulators felt it urgent to offer tools to help domestic firms counter trade risks.

Shanghai Electric Group signed an agreement with Indonesia-based PT Central Energi on exports of power facilities worth 13.68 million yuan. The payment was made yesterday in yuan to Shanghai Electric's account at the Bank of China in Shanghai from the account of Central Energi at BOC International in Hong Kong.

Shanghai Silk Group agreed to sell silk products to Hong Kong-based China Products Trading (HK) Ltd. It didn't reveal the deal's value.

Shanghai Huanyu Import & Export Co also signed a contract to import 300,000 yuan worth of lights and audio equipment from Hong Kong-based Ever Keen International Ltd. Both deals were handled by the Hong Kong and Shanghai Banking Corp in Hong Kong and the Bank of Communications in Shanghai.

Major currencies

"The yuan settlement program will certainly help bolster the mainland's trade with Hong Kong, Macau and ASEAN nations," deputy central bank governor Su Ning said at the ceremony. "The yuan is stable compared with other major currencies and it will help companies control exchange-rate risks."

The yuan has strengthened more than 20 percent against the US dollar since a peg was scrapped in 2005. The yuan/dollar rate has remained stable over the past several months as the government hoped to help struggling exporters.

Xu Weimin, chairman of Shanghai Silk Group, said the yuan settlement will help save the costs of converting foreign exchange into the Chinese currency and reduce exchange-rate volatility.

"It's always good to have an additional choice," Xu said. "The US dollar's fluctuations have hurt us badly. If our clients agree, we prefer to use the yuan to settle trade."

Chen Ying, vice president of Baoshan Iron & Steel Co, said that yuan settlement can help domestic companies better map out long-term finance plans.

China's biggest steel maker yesterday signed an agreement with the Bank of China to let the lender help it arrange yuan trade settlement.

Xu Jianguo, chairman of Shanghai Electric Group, said conducting the yuan settlement will help the company explore overseas business with reduced risks for both importers and exporters.


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