RMB trade settlement puts upward pressure on forex reserves

09:11, July 29, 2011      

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RMB settlement in cross-border trade intensifies upward pressure on forex reserves

One of the intentions of RMB internationalization is to increase RMB settlement in importing goods from abroad, which can not only alleviate the pressure on the surge in China's foreign exchange reserves but also reduce the foreign exchange rate risks facing Chinese enterprises. Nevertheless, the current situation is just the opposite of what China intended.

About 80 percent of RMB settlements in cross-border trade have come from imports. The Chinese enterprises that needed to buy foreign exchange from the central bank to pay for imports in the past can now use the RMB to make payments. This means there are no changes to the amount of foreign exchange reserves held by the central bank, which in the past faced the possibility of being reduced by domestic importers.

Only 10 percent to 20 percent of foreign importers want to pay in RMB for the importation of goods from China, so numerous domestic export enterprises can receive only U.S. dollars from foreign importers and have to convert them into the RMB.

According to data released by China's central bank on July 12, China's gross foreign exchange reserves stood above 3 trillion U.S. dollars at the end of June 2011, an increase of 30 percent from a year earlier. China's foreign exchange reserves rank first in the world, almost three times that of Japan in the second position and close to Germany's GDP, which stands at 3.5 trillion U.S. dollars.

Vast foreign exchange reserves have brought about tough management pressure, and the subsequent excessive issuance of RMB is regarded as one of the sources of domestic inflation. China had expected RMB internationalization to address the issue, but the move has just produced opposite results.

China had expected more RMB settlements in exports, and yet 80 percent of the RMB settlements in cross-border trade have come from imports.

"One of the intentions of RMB internationalization is to boost RMB settlements in importing goods from abroad, which can not only alleviate the pressure on the surge in foreign exchange reserves but also reduce the foreign exchange rate risks facing Chinese enterprises so as to reduce the use of the U.S. dollars through RMB settlement. The move has just produced opposite results," Yin Jianfeng, a financial researcher with the Chinese Academy of Social Sciences, said in an interview at the Lujiazui International Finance Research Center.

A few others hold similar views. Yu Yongding, an academician of the Chinese Academy of Social Sciences, has reviewed the process of RMB internationalization on several occasions since May and said the current measures go against the original intentions.

On July 6, 2009, the State Council decided to launch a pilot project of using RMB to settle accounts for the trades between the places of Shanghai and four cities of Guangdong and the places of Hong Kong, Macao and Association of Southeast Asian Nations. Now, two years have passed, and according to statistics made by the People's Bank of China, China had settled accounts of over 1 trillion yuan for the cross-border trades calculated in RMB in total by the end of April, 2011.
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