Yuan-Denominated Trade Settlement and the Internationalization of China's Currency

Abstract:     
China introduced yuan-denominated trade settlement in July 2009 to help its exporters avoid exchange rate risk. The pilot regions eligible to use the new settlement scheme in their trade with Hong Kong and Macao are Guangdong province and the Yangtze Delta region (Shanghai city, Jiangsu province, and Zhejiang province). A total of 365 companies, 182 of them foreign and 10 of those Japanese, have been selected to participate in the pilot program on the mainland China side.

Reasons cited for why the volume of trade settled in yuan has initially been fairly small include the difficulty in quickly changing from the foreign currency-denominated trade that has prevailed and the lack of yuan-denominated investment vehicles on the Hong Kong side.

The use of yuan to settle trade is seen as part of the internationalization of the yuan, which should move forward in stages. China's foreign exchange and capital transactions have already been liberalized roughly to the point where Japan was in the early 1970s. For the time being, the focus should be on expanding both the regions and products eligible for yuan-denominated trade settlement and the number of currency swap agreements that include the yuan.

Number of Pages in PDF File: 17

Keywords: China, yuan, internationalization of the yuan, yuan-denominated trade settlement

JEL Classification: F14, F31, F33, G15, G18, G21, G28

Accepted Paper Series