ZHONG MIN

Middle rate of renminbi against U.S. dollar breaks the 7:1 threshold on April 10, standing at $1=6.9920 yuan

The new sales contracts of COSCO Corp. (Singapore) Ltd., a Singapore-listed Chinese shipbuilding company, will be quoted in renminbi, announced the company's president Ji Haisheng. This is the first time a large Chinese company has officially announced that it will quote in renminbi when exporting.

COSCO Corp. (Singapore) Ltd. used to quote its sales contracts in the U.S. dollar. According to Ji, quoting in renminbi helps relieve the impact of continual depreciation of the U.S. dollar on the company. Since China introduced the exchange rate reform in July 2005, the renminbi has appreciated more than 15 percent.

COSCO Corp. (Singapore) Ltd. is not the only large international company to do so. With a background of the continual appreciation of the renminbi, more and more Chinese exporters are beginning to make their international quotations in renminbi, including Yiwu Jindelai Plastics Packaging Co. Ltd. (YJPP) in Zhejiang Province.

"We are now trying to settle with foreign companies in the renminbi," said Lin Zhengde, Manager of YJPP.

With a month's time delay between signing contracts and settling foreign exchanges, if prices are quoted in the U.S. dollar, fluctuations in exchange rate may reduce the actual amount of money that sellers receive. According to Lin, if settling in renminbi, they can get a fixed amount of payment however the exchange rate fluctuates, thus reducing the risks of settling foreign exchange to zero.

Statistics released by Alibaba.com, an online agent for Chinese suppliers and international buyers, show that most of its 700,000 Chinese suppliers have quoted in the euro, the British pound, the Australian dollar or the renminbi, instead of the U.S. dollar, when settling transactions with companies outside the United States.

Many foreign companies are gradually adapting to renminbi quotations. According to Lin, when negotiating with some companies in Japan and the Middle East in March, he proposed to settle in renminbi, but compromised to settle some transactions in the U.S. dollar and others in renminbi.

"Since the renminbi appreciates against the U.S. dollar, more and more companies will choose to quote or settle in renminbi, which is conducive to promoting the renminbi as an international currency," said Cao Honghui, a research fellow with the Institute of Finance and Banking of the Chinese Academy of Social Sciences.

More circulated overseas

Cao has conducted years of research on the overseas circulation of the renminbi. He found that it used to circulate only in boundary areas, but is now circulating and being changed in some developed countries. Though without exact figures, he recognizes that the renminbi is more and more widely circulated overseas with growing amounts.

In Cao's opinion, the renminbi has become another "hard currency" in Southeast Asia after the U.S. dollar, the euro and the Japanese yen.

In northeast areas of Laos, the renminbi can completely replace local currency and flows even to the country's capital Vientiane. Boundary trade between China and Myanmar has registered renminbi cash flows of over 1 billion yuan ($142.86 million) each year.

In Viet Nam, the renminbi is circulated all over the country, and the National Bank of Viet Nam operates a renminbi deposit service.

The renminbi is also circulating in the five Central Asian nations, as well as Russia and Pakistan. According to Cao, in Central Asia, Kazakhstan has the biggest renminbi cross-border circulation volume, standing at 1 billion yuan ((143 million).

In Mongolia, the renminbi has already become a major foreign currency, said Cao. Banks in Mongolia now all operate a renminbi deposit service. In the border trade between China and Mongolia, transactions in the renminbi cash have taken up more than one third of the total.

In the wider international community, Hong Kong bears the largest renminbi cross-border circulation. In Hong Kong, the renminbi can be freely converted through various ways. It is also used as a reserve currency for investment in Hong Kong, said Cao.

Furthermore, in trade activities between China and its neighboring countries and regions, the renminbi has already served as a "regional settlement currency." Early in December 2004, the People's Bank of China, the country's central bank, noted that the renminbi had been a major settlement currency in border trade between China and its neighboring countries like Russia, Mongolia, Viet Nam, Myanmar and Nepal.

Obstructions

Zhong Wei, Director of the Research Center of Finance of Beijing Normal University, deems that despite the impetus of U.S. dollar depreciation, the renminbi is not likely to become an international currency in the short term. However, he says, in the next 10 years it could become a dominant currency in Asia.

In Zhong's opinion, to become an international currency, the renminbi must first become a settlement currency of international trade and a regional currency. During this process, central banks of some countries may choose the renminbi as their reserve currencies. Finally, with perfection of the exchange rate formation mechanism and realization of free convertibility, the renminbi will then become an international currency. However, since reform of China's exchange rate mechanism only recently started and the mechanism is not yet perfect, there is still a long way to go for the renminbi to be freely converted.

From the point of view of the Chinese Government, to realize free convertibility of the renminbi, there must be a sound banking system first. Hence, the State Council has already set up the policy of first carrying out the reform of state-owned banks, and then launching the reform of the exchange rate. It can be asserted that the process of China's reform of state-owned banks will decide the speed of the renminbi internationalization, something that is in progress now.

"Although the renminbi is more and more influential in the international community, before the completion of China's banking reform, free convertibility of the renminbi will not be launched," Zhong declared.

In fact, because the renminbi is not yet freely converted, "settlement with the renminbi" claimed by many Chinese companies is quite difficult. "In foreign countries, the renminbi is not always available, so how can foreign clients get the renminbi to pay you?" Zhong continued. "Moreover, if they don't convert the money to the U.S. dollar or other freely convertible currencies, it may be hard for their banks to directly remit the renminbi to China. Therefore, under the present mechanism, it is unrealistic to completely settle in the renminbi."

According to Zhong, it is practical now to quote in renminbi in foreign trade. Losses of exchange rate fluctuations can be avoided when settling in the U.S. dollar at the exchange rate on the settlement day.

Wang Jian, Secretary General of the China Society of Macroeconomics, thinks it is inevitable that the Chinese capital market must be opened if the renminbi is to be an international currency. "But the capital market cannot be opened now; otherwise, it will be a big disaster," Wang stated.

"We should manage to retard the internationalization of the renminbi and give priority to developing the capital market. My understanding is that the renminbi should become an international currency passively," Wang said.

Companies in China's neighboring countries are holding an increasing amount of the renminbi, and some countries even make the renminbi their "settlement currency." Wang holds that these are actually measures of transaction for their own interests. The renminbi is not yet a reserve currency in any country, and there is quite a long way to go for the renminbi to be an international currency.

Liu Hongjun, researcher at the China Institute of Contemporary International Relations, believes that some domestic economic factors also obstruct the renminbi from turning into an international currency, as renminbi appreciation has led to some adverse effects on certain aspects of the Chinese economy.

According to Liu, productivity in the Chinese agricultural sector is very low and prices of China's farm produce are not competitive in the international market. Because of renminbi appreciation, prices of China's farm produce may be affected by imported ones, creating difficulties for the country's agricultural development.

Further, in the capital structure of Chinese financial institutions, foreign currency capital, usually U.S. dollar capital, account for a large proportion. The renminbi appreciation may lead to the shrinkage of foreign currency capital, reducing returns of China's financial institutions.

"Under these circumstances, the Chinese Government will be more prudent in the free convertibility of the renminbi," Liu concluded.