Ex­tend­ing the yuan’s reach

China Daily (Hong Kong) - - BUSINESS INSIGHT - By FUNG VUN KET

In­ter­na­tion­al­iza­tion of the yuan is tak­ing ma­jor strides to­wards be­com­ing a re­al­ity. As China’s big­gest part­ner in the re­gion, Malaysia needs to pre­pare it­self for this even­tu­al­ity, and in­crease the per­cent­age of its trade with China that is set­tled in yuan.

Ac­cord­ing to a re­port re­leased by the Bank for In­ter­na­tional Set­tle­ments in Septem­ber, the yuan jumped from the 17th spot in 2010 to the ninth most ac­tively traded cur­rency in the world. The key lies in ex­pan­sion of off­shore trade.

In a re­port by HSBC, yuan us­age is pre­dicted to ac­count for an es­ti­mated $2 tril­lion in 2015, which will cat­a­pult the cur­rency to be­com­ing the third largest trad­ing cur­rency af­ter the dol­lar and the euro.

Com­pared with the dol­lar, euro and yen — cur­rently the world’s top three most traded cur­ren­cies — the mar­ket share of the yuan re­mains small. How­ever, the rapid growth of yuan off­shore trad­ing proves the cur­rency is on track for in­ter­na­tion­al­iza­tion.

The is­sue of yuan in­ter­na­tion­al­iza­tion has be­come im­per­a­tive as global fac­tors are taken into ac­count. Ex­am­ples in­clude the debt cri­sis in the United States and Euro­pean Union; global mon­e­tary eas­ing poli­cies; the weak­en­ing of tra­di­tional in­ter­na­tional cur­ren­cies and an in­suf­fi­cient sup­ply of gold and other pre­cious met­als.

But, is the yuan pre­pared to in­ter­na­tion­al­ize?

Even with fa­vor­able statis­tics and an en­cour­ag­ing global eco­nomic back­ground, the Chi­nese govern­ment and cen­tral bank still need to do more com­pre­hen­sive and sys­tem­atic plan­ning.

This plan­ning in­cludes: ex­pand­ing the off­shore yuan set­tle­ment mar­ket; un­leash­ing yuan cross-bor­der set­tle­ment to all in­dus­tries; en­larg­ing cur­rency swaps and links with trad­ing set­tle­ments; en­cour­ag­ing yuan­de­nom­i­nated trad­ing fi­nanc­ing and im­prov­ing the Chi­nese fi­nan­cial mar­ket sys­tem.

No time frame was pro­vided for the yuan’s in­ter­na­tion­al­iza­tion at this month’s third plenum by the Chi­nese Com­mu­nist Party, but there is no doubt China wants it to be­come a ma­jor global cur­rency. This in­ten­tion was clearly shown in the re­port of the third plenum.

As­sum­ing that yuan in­ter­na­tion­al­iza­tion is forth­com­ing, the ques­tion arises: Can Malaysia, China’s big­gest part­ner in the re­gion, ben­e­fit from this?

In Septem­ber 2011, Bank Ne­gara Malaysia ap­pointed Bank of China Malaysia as the yuan On­shore Set­tle­ment In­sti­tu­tion. The real time set­tle­ment sys­tem op­er­ated in 2012, with 11 fi­nan­cial in­sti­tu­tions join­ing the ser­vice, in­clud­ing May­bank, CIMB and Pub­lic Bank among oth­ers.

The ser­vice en­ables trade set­tle­ment in yuan be­tween busi­nesses in Malaysia and China, as well as yuan funds trans­fer via the elec­tronic trans­fer sys­tem.

Since on­shore set­tle­ment ser­vices started in mid-2012, af­ter nearly one-and-a-half years, statis­tics show that the pro­por­tion of Malaysia en­ter­prises us­ing the yuan set­tle­ment is only about 1 per­cent of to­tal bi­lat­eral trade.

As Malaysia-China bi­lat­eral trade ac­counted for $94.8 bil­lion last year, the us­age of yuan on­shore set­tle­ment came to just around $1 bil­lion. Malaysia and China signed a 180 bil­lion yuan ($29.4 bil­lion) cur­rency swap agree­ment in 2012.

Then, dur­ing Chi­nese Pres­i­dent Xi Jin­ping’s visit to Kuala Lumpur last month, both coun­try lead­ers ex­pressed the in­ten­tion to ex­pand the size of the cur­rency swap. As Malaysia and China look to ex­pand the bi­lat­eral trade to $160 bil­lion by 2017, this un­doubt­edly re­flects the like­li­hood that bi­lat­eral trade will be more fre­quent than be­fore.

With bi­lat­eral trade and the amount of cur­rency swap on the in­crease, can this trans­late to the in­creas­ing use of yuan on­shore set­tle­ments for Malaysia’s en­ter­prises?

From An­bound’s ob­ser­va­tions, the rea­sons for poor yuan on­shore set­tle­ment per­for­mance in Malaysia mainly come from two as­pects. First, there is the lack of pub­lic and mar­ket aware­ness and poor un­der­stand­ing of yuan set­tle­ment sys­tem ser­vices. Although the on­shore set­tle­ment sys­tem was launched in Malaysia in 2012 with most of the big fi­nan­cial in­sti­tu­tions join­ing the sys­tem, the re­lated aware­ness cam­paign did not catch on. Also, de­tails of on­shore set­tle­ment ser­vices were not widely re­ported in the me­dia.

Sec­ond, the US dol­lar is still widely used in Malaysian in­ter­na­tional trades, with many in­dus­try play­ers be­liev­ing dol­lar-de­nom­i­nated trade is more con­ve­nient and cheaper than us­ing other cur­ren­cies. Malaysian com­pa­nies still pre­fer to use the dol­lar when trad­ing with China, as they would with other trad­ing part­ners in the US and EU. Trad­ing in a sin­gle cur­rency also al­lows firms to avoid com­pli­ca­tions in ac­count­ing. Fung Vun Ket is an an­a­lyst at the Kuala Lumpur of­fice of An­bound Re­search, one of the largest in­de­pen­dent think tanks on the Chi­nese main­land.

AFP

A money changer counts Malaysian ring­git notes for cus­tomers at a for­eign ex­change booth in Kuala Lumpur. Malaysia has a weak yuan on­shore set­tle­ment per­for­mance be­cause of a lack of pub­lic and mar­ket aware­ness and a de­pen­dency on US dol­lar-de­nom­i­nated trad­ing.

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