Chapter 3 Important Incidents and Their Influences

3.1 Realize overall cross—border trade settled in Renminbi

3.1.1 Ever expanding scope of cross—border trade settledin Renminbi

In 1997,the State Administration of Exchange Control issued the Interim Measures of Administration of Border Trade Exchange,allowing settlement in Renminbi,but asking foreign trade institutions to open specified account for Renminbi settlement.It also stipulates that account funding can only be used for payment of border trade.It is the beginning stage of Renminbi settlement of cross—border trade.At this time,the settlement scope is limited in border trade companies in specified area and the scale is rather small,which aims at building the basis for the usage of Renminbi to increase the circulation in neighboring countries and improve influence of Renminbi.

In recent years,with the healthy development of Chinese economy and ever increasing degree of open—up,the trade scale between China and neighboring countries and regions is expanding.Meanwhile,global financial crisis and the slowing down of world economy make the main settlement currency U.S. dollar and Euro experience violent fluctuations.In order to avoid exchange rate risk,trade companies generally hope to use Renminbi whose value is more stable to value and settle.The demand for Renminbi settlement of border trade extending to international trade is increasing continuously.

On April 8,2009,China first started Renminbi settlement of cross—border trade in Shanghai and other four cities.Afterwards,China expanded the experiment area of Renminbi settlement of cross—border trade step by step in two stages.Finally in August in 2011,China realised overall Renminbi settlement of cross—border trade(Table 3—1 and Figure 3—1).

Source:The People Bank of China,the Ministry of Finance.

Figure 3—1 Process of the development of Renminbi settlement of cross—border trade

3.1.2 Ever increasing content and amount of Renminbi settlement of cross—border trade

At present,Renminbi settlement of cross—border trade includes cross—border merchandise trade,service trade and other current account trade.Foreign region is not limited according to the policy,and corporations can choose Renminbi to settle with market rules.Import merchandise trade,cross—border service trade and other current account settlement are not limited to the expe—riment corporations.

Renminbi settlement experimental units of cross—border trade were launched in 2009.On August 25,State Administration for Taxation issued a notice,making clear the procedures of export tax reimbursement for the Renminbi settlement experimental units of cross—border trade.At the beginning of September,export tax reimbursement of cross—border trade settled in Renminbi was started formally and related measures were completed. Afterwards,the total amount of cross—border trade settled in Renminbi by the banks was increasing,and till the third quarter there first appeared a decrease(Figure 3—2).

Figure 3—2 Cumulative business amount of cross—border trade by the banks

Source:The People's Bank of China.

Decreasing of the total amount of Renminbi settlement of cross—border trade may not mean shrink of the real scale of cross—border trade settled in Renminbi,and we cannot come to the conclusion that Renminbi internationalization goes backwards or paused.

3.1.3 Analysis of the influences

1.Main influences.

In terms of short periods,expanding of the Renminbi settlement scope of cross—border trade makes export corporations' development prospect better.First,the cost of import corporations and income of export corporations can be more fixed,regardless of exchange rate fluctuation,which can benefit the financial accounting of the corporations to make the business outcome more clear and predictable.Second,compared with the settlement method of home currency—third part currency—home currency,it saves at least two transfer costs for corporations,simplifying the procedures of payment and settlement.Third,it helps inland corporations save related expense of avoiding exchange rate risk through foreign currency derivative trade.

To Chinese banks,they can improve their international influence through this opportunity.On the one hand,with the increasing amount of Renminbi settlement,settlement network will extend to the world,which calls for Chinese banks to speed up building overseas branches and institutions,and helping Chinese banks look for more profit space and increase revenue.On the other hand,Chinese banks in charge of Renminbi settlement are helpful to improve the profile and fame in international finance market.

To China,the ever increasing amount of Renminbi settlement of cross—border trade is good for relieving the economy and policy pressure brought by greatly increasing official exchange reserve.Of course,it is also good for Renminbi to fully act as an international currency.

In terms of long periods,realizing Renminbi settlement of cross—border trade all over the country creates more helpful conditions for internationalization of Renminbi.

Generally speaking,currency internationalization will experience settlement currency to investment currency,and then to reserve currency.Developing Renminbi settlement of cross—border trade will decrease the dependence of third party currency such as U.S. dollars in our foreign trade activities and help improve international status of Renminbi,laying the foundation of Renminbi acting as investment and reserve currency within regions in the future.Moreover,after Renminbi is used for international settlement within regions,there appears new and complete reference standard in determining currency value.It will be useful for completing mechanism of Renminbi exchange rate,and meaningful for getting pricing right of Renminbi asset worldwide.

2.Existing problems and prospect forecast.

We cannot deny that bottleneck and bafflement are existing in the deve—lopment process of Renminbi settlement of cross—border trade.

First,acceptance abroad is still limited.Inland usage of Renminbi settlement in policy level makes the scale of Renminbi settlement of cross—border trade to develop more rapidly in 2011 than that of 2009.However,the geographic distribution of Renminbi settlement outside borders is not balanced,mainly concentrating in neighboring areas such as Hong Kong and Singapore.According to SWIFT,Renminbi settlement of trade between inland and Hong Kong takes up to 90%.Although China has become the world second largest export country,Renminbi settlement takes less than 10% in all foreign trade activities,which indicates that acceptance of Renminbi all over the world is still very low(Figure 3—3).

Figure 3—3 Proportion of Renminbi settlement in foreign trade

Second,finance service cannot keep up efficiently,so realizing Renminbi settlement worldwide faces technique constrains.In practice,except for Hong Kong,Singapore and ASEAN,even though Chinese corporations’ foreign clients are willing to accept Renminbi,most of their bank systems do not know how to operate the service.What's more,foreign branches of Chinese commercial banks develop slowly,which restricts the scale and area of Renminbi settlement.

Third,the circulation channel of outside Renminbi is blocked,making Renminbi holders lacking channels to hedge risk and get earnings. Although investment instrument such as offshore Renminbi bonds has appeared in Hong Kong,to the holding scale of outside Renminbi,the circumfluence mechanism is not complete.Renminbi finance products in international finance market are not much,which will prevent the amount of Renminbi settlement of cross—border trade from increasing.

Finally,though there is no policy limit to choosing Renminbi settlement in foreign trade in theory,which currency to use to price and settle depends on market choice and the most important factor is that transaction part has real power of decision of settlement currency.Our export focuses on low—tech and low value—added products and stands at the weak position in division of production and income apportionment,lack of choice and discourse right in choosing settlement currency in international trade.It restricts the usage of Renminbi in international trade pricing and settlement.Meanwhile,among Chinese import merchandise,most is international commodity.According to convention,all of international commodity is almost priced in U.S. dollars,and the status of U.S. dollars cannot be affected by Renminbi at present.

Based on above existing problems,the government should focus on clearing out Renminbi circumfluence channel and improve the world's willingness to hold Renminbi.Chinese banks should develop overseas business stably and actively develop creative products and services that satisfy clients’ cross—border finance demand.Domestic trade corporations should also actively start technical renovation and product update to improve value in the process of product designing,brand creating and marketing.Also,they should improve the discourse right in contact with other countries,especially master choice right of settlement currency.Only in this way can we improve the acceptance and influence of Renminbi in global stage.