RMB trade settlement puts upward pressure on forex reserves (2)

09:18, July 29, 2011      

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Behind the settled accounts of more than 1 trillion yuan is the outstanding structural contradiction.

An insider, who is from a Shanghai branch of the Bank of China and has participated in the pilot project of settling accounts of cross-border trades in RMB, told the reporter that, "We found that the RMB is becoming more popular at times when China is importing. For example, against currencies of some Southeast Asian countries and regions, the RMB has been appreciating for several years, and therefore, accepting the RMB is a wise choice for these countries. However, when China is exporting, only 10 to 20 percent of these trade partners are willing to pay Chinese enterprises in RMB. The payments that most export enterprises of China get are still in U.S. dollar, and they have to exchange them into the RMB."

Yin said frankly that, of the total amount of RMB used for the cross-border trades, 80 percent was used for China's import trades by the end of 2010. "Originally, these import enterprises had to purchase the foreign currency from the Central Bank of China to pay for the goods imported. But now, they do not need to do that any more, because they can pay directly in RMB. It means that the part of the foreign exchange reserve of the Central Bank, which could be reduced in the past, cannot be reduced now."

"The central bank not only did not achieve the goal of its policy but also is going in the opposite direction," said Gao Dexin, a senior analyst from the Credit Agricole Corporate and Investment Bank. "This kind of policy design contradicts the goal of RMB internationalization. By settling accounts in RMB, not only have the pressures of China foreign exchange reserve and the exchange rate risk of China's enterprises not been alleviated, but also the pressures of the foreign exchange reserve and RMB appreciation have both strengthened. And the strengthened pressure of RMB appreciation also makes China's trade partners more willing to accept the RMB when they are exporting goods to China."

In order to realize the RMB internationalization, the foreign exchange control must be loosened, but the idea of using the opening-up to promote the reform is still controversial.

"If China wants to realize RMB internationalization, it must further loosen its foreign exchange control and allow the RMB to be used in other areas, such as the direct investment by foreign merchants," said Gao Dexin.

Yin believes that the original logic for designing the system is that, in order to realize the great goal of RMB internationalization, the foreign exchange control in capital projects will be loosened. But before that, interest rates must realize the marketization and exchange rates must be fluctuant.

"An unspoken objective of RMB internationalization is to promote the financial reform," Yin said, adding that as it is difficult to carry out the financial reform in the existing policy environment, policy-makers, who have learned from China's accession to the WTO, have decided to promote the reform through the internationalization of the RMB.

However, Yu believes that the idea of promoting the financial reform through the RMB internationalization is understandable but kind of impractical. Under current circumstances, capital controls are necessary for the reform of China's financial and monetary systems. In fact, RMB internationalization has aggravated the instability of China's financial system instead of promoting the financial reform.

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