Declining Trade Surplus, Yuan Appreciation and Internationalization

China’s currency Renminbi (RMB), known as the Yuan, strengthened to an all-time high of 6.5671 per US Dollar in early March.  The ‘redback’ has appreciated 3.81 % against the greenback since last June when the People’s Bank of China (PBoC), China’s central bank, unfastened a de facto peg to the Dollar in place since the financial crisis.  The Yuan’s record rise coincided with the smallest trade surplus in 10 months, down to $4.9 billion in February from $6.5 billion in January.  Trade analysts suggest the drop coupled with a downward trend over the past two years may help support China’s contention that its trade with the rest of the world is becoming more balanced.  They estimate that China’s annual surplus may drop to $160 billion from $183 billion last year.
Premier Wen Jiabao, talking to netizens during an online session recently, reiterated China’s policy of gradual appreciation, citing predicaments of exporters, difficulties in employment generation, and concerns for social stability.  He emphatically ruled out a sharp one-off hike as demanded by US lawmakers, saying that millions of migrant workers would be laid off.  In early 2009 at the height of the financial meltdown, more than 20 million migrants lost their jobs and were forced to return to the countryside where under-employment is the norm.  Speaking at the on-going National People’s Congress (NPC) proceedings, the President of the Bank of China said Chinese companies could only tolerate annual gains of 3-5%.
Although committed to slow appreciation of the RMB, the Chinese government is expanding pilot projects to allow more Chinese and foreign companies to settle cross-border trade deals in RMB.  Last June, the PBoC broadened a scheme to allow importers and exporters in 20 provinces to settle transactions in RMB, involving more than 67,000 mainland exporters.  The pilot program proved so successful that settlements topped 506 billion RMB ($77 billion).  HSBC economists forecast that at least half of China’s trade with emerging markets will be settled using RMB within 3-5 years from less than 3% now.
The PBoC is positive on foreign central banks using the RMB as a reserve currency, on allowing overseas investment using RMB, and is mulling the possibility of using RMB for FDI in China.  Channels are being extended through which RMB can flow back into China via foreign bank purchases of bonds in China’s inter-bank market.  Transnational banks such as HSBC and Standard Chartered are among 5 foreign banks allowed to trade in that bond market and Citigroup and Deutsche Bank are preparing to offer RMB settlement products of their own.  Finally, the government has signed bilateral currency swap deals with a number of countries totalling 803.5 billion RMB ($122.24 billion) by the end of 2009.         

 - Global Times, Xinhua, Shanghai Daily, and Bloomberg