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City joins trial to settle trade in yuan

CHINA'S State Council yesterday approved a trial plan that allows Shanghai and four other mainland cities to use yuan to settle overseas trade transactions.

The move makes Shanghai a participant in currency innovation and will help it fulfill its plan to become a major international financial center by 2020.

The other trial-site cities are in processing-trade strongholds in southern China's Guangdong Province: Guangzhou, Shenzhen, Zhuhai and Dongguan. The Cabinet said in a statement that it will release related regulations "as early as possible."

"China has long wanted to raise the importance of the yuan to the global economy, while the economic crisis has provided an opportunity to accelerate the process," said Ben Simpfendorfer, chief China economist at the Royal Bank of Scotland.

The trial is expected to help stabilize trade, trim exporters' currency exposure and build the yuan's position in the international monetary system. The Cabinet statement did not specify which countries or regions would be involved in the transactions.

But China said late last year that it planned to launch yuan settlement trials for trade by mainland cities in Guangdong and the Yangtze River Delta with the Hong Kong and Macau special administrative regions.

A trial for trade between Yunnan Province and the Guangxi Zhuang Autonomous Region and the members of Association of Southeast Asian Nations is also in the pipeline.

"The trial scheme is worth keeping an eye on as this will offer a guide to how quickly the authorities intend to liberalize yuan trade settlement more broadly," Simpfendorfer said.

China has so far weathered the heaviest gales from the global recession. The World Bank said on Tuesday that the decline in China's economic growth may bottom out around the middle of the year. But the country's exporters have been hit hard by the global woes and won't rebound until conditions improve in the rest of the world.

The domestic currency has gained 21 percent against the US dollar since July 2005 when China replaced its peg to the greenback with a basket of currencies. The yuan's growth has stalled against the dollar since the middle of last year.

But the yuan has appreciated against other major currencies, including the British pound, the Australian dollar and Korean won, adding to transaction costs for Chinese exporters.

In the past four months, the People's Bank of China has signed currency swap deals worth a total 650 billion yuan (US$95.3 billion) with Hong Kong, Indonesia, South Korea, Malaysia, Belarus and Argentina.

The swaps permit the overseas authorities to sell yuan to their importers who want to buy Chinese goods.

Economists said the deals are good for China's exporters, as developing countries have become increasingly important export markets for China.

The package of yuan polices is also in line with measures from the Group of 20 London summit last week to boost trade financing.


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