In response to the current financial crisis that has brought about wide fluctuations in the foreign currency exchange rates, the Chinese government recently implemented new rules to allow some Chinese companies in designated cities to settle their cross-border transactions in the Chinese currency—the Renminbi. By allowing international trades to be settled in Renminbi, China has taken the official first step to promote greater international acceptance of the Renminbi, which may eventually establish the Renminbi as an international reserve currency.
On July 1, 2009, the Chinese central government agencies[1] promulgated the Administrative Rules on Pilot Program of Renminbi Settlement for Cross-border Trade Transactions (“Administrative Rules”). This pilot program allows designated companies registered in five Chinese cities[2] to use Renminbi to settle cross-border trades with companies doing business in Hong Kong, Macao and Asean-member countries[3]. Companies participating in this pilot program may continue to settle their trades in U.S. Dollars and other foreign currencies as settlements in Renminbi are voluntary. Under a special power granted by Article Five of the Administrative Rules, the People’s Bank of China will closely monitor the aggregate amount of Renminbi settlements to ensure that the Renminbi settlements will not undermine China’s macro economic policy objectives.
Companies wishing to settle their cross-border trades in Renminbi can choose between two options under Article Six of the Administrative Rules. The first option is to settle the trades through commercial banks in Hong Kong or Macau that are approved by (i) the People’s Bank of China and (ii) the Hong Kong Monetary Authority or the Macau Monetary Authority, which ever is applicable. These commercial banks must also be members of the People’s Bank of China’s Large Value Payment System.[4]
The second option is to settle the trade through a Chinese domestic bank operating in one of the designated cities under this pilot program. The Chinese domestic bank will serve as the agent bank for the overseas participating bank used by the non-Chinese trading partner. To facilitate Renminbi settlements, the Chinese agent bank will maintain an inter-bank fund transfer account denominated in Renminbi for the overseas participating bank. Under this arrangement, the Chinese agent bank will also be responsible for disclosing the agency agreement and reporting any Renminbi account information to the People’s Bank of China.[5]
In conclusion, by allowing companies to use Renminbi under a closely supervised pilot program to settle international trades, China has taken a big step forward in a long journey towards the goal of greater universal acceptance of the Renminbi as a reserve currency.
1 These agencies include the People’s Bank of China, Ministry of Finance, Ministry of Commerce, General Administration of Customs, State Administration of Taxation, China Banking Regulatory Commission.
2 Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan are the five cities chosen by the State Council to participate in the pilot program.
3 The Association of Southeast Asian Nations, commonly known as ASEAN, includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Myanmar, Cambodia, Laos, and Vietnam.
4 Some commentators refer to this option as the settlement option or pattern.
5 Some commentators refer to this option as the proxy option or pattern.