A shopper counts yuan notes at a vegetable market in Beijing, China, on May 25, 2009

China may soon allow companies in its southern provinces of Yunnan and Guangxi to use yuan to settle cross-border trade with Southeast Asia to reduce foreign-exchange risks, a government official said.

“Preparation work for the pilot programs are progressing smoothly,” Nong, also deputy head of the Guangxi government bureau organizing such exhibitions, told reporters in Nanning. “Some companies that were deterred by foreign-exchange risk may now seek to expand overseas as the risks have been reduced.”

China, the world’s third-biggest economy, is seeking to make it easier for companies to do business in yuan and to expand trade with so-called Golden Triangle nations after the global recession choked sales to the US and Europe. Chinese officials, including President Hu Jintao, have called for reducing its dependence on the dollar and the creation of a new global reserve currency.

The People’s Bank of China has agreed to provide 650 billion yuan (US$95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency-swaps. On Monday, the central bank signed an agreement with Hong Kong to allow the settlement of cross-border trade in yuan.

Trade in yuan

Malaysia, Indonesia, Brazil and Russia have all indicated interest in settling transactions in the currency. PT Perusahaan Listrik Negara, Indonesia’s state utility, may negotiate to pay its Chinese suppliers and contractors in yuan to cut foreign-exchange costs, Finance Minister Sri Mulyani Indrawati said on April 24.

“As China’s role in the global economy becomes more significant, it’s natural that more countries will want to trade in the Chinese currency and to hold it in their reserves,” said Pan Hejun, Vice Mayor of Nanning.

Since 2003, the Beijing-based State Administration of Foreign Exchange has allowed limited use of yuan in border trade in Yunnan, Heilongjiang, Guangxi, Inner Mongolia, Xinjiang, Liaoning and Jilin, according to the currency regulator in a book compiled this year.

Slowing economy

China’s State Council said last December that it will allow Guangxi and Yunnan provinces to conduct yuan settlement in a pilot program with Southeast Asian nations. It also announced in April that it will allow the yuan to be used for international trade in Shanghai and four cities in Guangdong province, including Guangzhou and Shenzhen.

The yuan has gained 21 percent against the greenback since a dollar peg was scrapped in 2005, eroding the value of exporters’ dollar-denominated profits. The spot rate was little changed today at 6.8318 per dollar, according to China Foreign Exchange Trade System.

China has limited the yuan’s advance as a stronger currency, which makes its exports less competitive at a time when the economy is forecast by the World Bank to expand 7.2 percent in 2009, slowing from 9 percent last year. Exports tumbled a record 26.4 percent in May.

Source: Bloomberg