China moves again to cut reliance on dollar

By Richard McGregor
Financial Times, London
Friday, July 3, 2009

http://www.ft.com/cms/s/0/f8a7105c-676a-11de-925f-00144feabdc0.html

BEIJING -- China has taken another step toward internationalising its currency and reducing reliance on the US dollar with the announcement of new rules to allow select companies to invoice and settle trade transactions in renminbi.

The regulations released by the People's Bank of China, the country's central bank, will allow approved companies to settle transactions through financial institutions in Shanghai and other cities in southern China.

Offshore, the trial scheme will allow transactions to be settled in renminbi in Hong Kong and Macao, the two self-governing territories on China's southern borders, and later in a limited fashion in south-east Asia as well.

Importers and exporters will be able to place orders with authorised Chinese companies, and settle payment for them, in renminbi.

Although it has no short-term implications for the full convertibility of the renminbi, the announcement adds to the volley of political signals Beijing has sent recently over its dissatisfaction with the US dollar.

"To many minds in China the US dollar's time is almost up, the eurozone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favours," said Stephen Green, of Standard Chartered, in Shanghai.

"For them, the renminbi is an obvious, and imminent, replacement."

Far from being a replacement for the dollar as a freely-traded reserve currency, the move has been justified by the PBoC initially as assisting exporters buffeted by the greenback's fluctuating value.

"Companies in China and neighbouring countries are facing relatively large risks of exchange-rate fluctuations because of big swings in the US dollar, the euro and other major currencies used for settlements," the PBoC statement said.

The rules have also been expressly drafted to ensure that the new regime is not used to circumvent China's capital controls, by requiring supporting documentation for transactions.

"Domestic settlement banks should take effective measures to know the nature and purpose of their clients' trading," the central bank said.

The announcement of an offshore role for the renminbi chimes with China's call earlier this year for a new reserve currency.

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