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Expert: Cross-border Renminbi settlement confronts globalization challenges
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14:07, July 10, 2009

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Cross-border trade RMB settlement will promote free conversion

Cross-border trade RMB settlement will enhance competitiveness of Chinese banks

Chinese banks active in transacting yuan cross-border settlement

On July 6, Cross-border trade Renminbi settlement was formally launched. On the same day, the Bank of China (Hong Kong) Limited (BOCHK) handled a Renminbi payment service for Shanghai Electric Group (Hong Kong). The pilot Renminbi trade settlement, which had high expectations, has finally taken a substantial step.

While bringing about tremendous opportunities, the launch of cross-border trade Renminbi settlement has also presented China with new challenges.

The launch of cross-border trade Renminbi settlement and its business potential depend not only on the modernization level and operational efficiency of China's settlement system, but also on Renminbi's two important functions as an international settlement currency: firstly, whether the Renminbi settlement will be able to meet the demand of value preservation from overseas investors holding a surplus of the currency, and secondly, whether Renminbi will be able to effectively guide and control the demand from these overseas investors regarding its appreciation. Japanese yen's failure to globalize was due to the inability of its financial system to guide its appreciation and preserve its value for its holders.

Cross-border trade Renminbi settlement was launched when the market-saving endeavors of governments across the world began to fade and Renminbi globalization and financial opening-up accelerated.

One cannot exclude the potential demand for Renminbi due to short-term flow of global capital driving its value up, following an excessive capital injection by governments worldwide, said Professor Sun Zhijian, associate dean of School Economics.

Although the current Renminbi settlement service is unable to help overseas investors to rapidly accumulate enough holdings, with the continuous promotion of Renminbi globalization, a large number of foreign investors, motivated by "selling at high prices for profit," will be more likely to retreat from the market following the natural adjustment of China's economic cycle. Therefore, the decision-making authorities must be on guard.

As a result, China needs to promote Renminbi globalization with the help of Hong Kong, Macao, Taiwan, and the international community. The development of the Hong Kong RMB offshore bond market is needed to make up for the troubles caused by the underdeveloped markets for interest and bonds in the Chinese mainland.

A currency exchange based on investment and trade is needed with emerging markets to help more countries and enterprises to recognize the advantages of Renminbi and its economic strength as an international currency.

This helps reduce outside resistance in the process of Renminbi globalization and lay a solid market foundation for its true globalization, Sun said.

By People's Daily Online

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