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Follow-up work needed for yuan's going global


20:54, April 10, 2013

BEIJING, April 10 (Xinhua) -- China and Australia started direct trading of their currencies on Wednesday.

Analysts said promoting the yuan's direct trading and currency swap with other currencies will lay down institutional foundation for the yuan's going global, but more follow-up work, including developing financial products and tools, is needed for the framework to truly take effect.

China has been taking incremental steps to internationalize its currency in recent years, including launching direct trading between the yuan and the Japanese yen in June 2012. Meanwhile, the yuan is also directly traded with the U.S. dollar.

Since 2008, China has signed bilateral currency swap agreements with over 20 countries and regions across the world, with total capital amounting to over 1.6 trillion yuan (255.8 billion U.S. dollars).

On March 26, a bilateral currency swap agreement was inked between the central banks of China and Brazil, the first agreement of its kind within the BRICS countries.

Direct trading between the yuan and an increasing number of influential currencies shows the yuan's function as a reserve currency is improving, said Zong Liang, deputy head of the Institute of International Finance with the Bank of China.

On the other hand, given that the total cross-border flow of the yuan is still limited, currency swap agreements have provided the yuan's offshore market with broader access to the currency, according to analysts.

Meanwhile, China has not fully liberalized its capital account, hence making the yuan's direct trading with more currencies as well as swap agreements with more countries is an important institutional foundation to globalize the currency.

However, the two kinds of measures will not bring about obvious effects in the short term, unless more follow-up work is done to make the yuan more appealing to the international financial market.

Direct trading between the yuan and the Japanese yen, for example, was estimated to benefit the Chinese and Japanese companies by cutting about 3 billion U.S. dollars in transaction cost.

But Japanese companies have showed a lukewarm demand for holding the yuan on the Tokyo foreign exchange market since June. The average daily trading volume between the Japanese yen and the yuan reached 10 billion yen in 2012, about 1.4 percent of that between the yen and the U.S. dollar.

More yuan products, including forwards and swaps, as well as hedging tools, should be developed to facilitate the yuan's direct trading with foreign currencies, urged Cao Honghui, vice president of the Research Institute of the China Development Bank.

It is down to the market to decide whether the yuan can replace other currencies, Cao said.

Ma Jun, chief economist at Deutsche Bank Greater China said signing currency swap agreements does not mean kicking off a bilateral currency swap mechanism.

In addition to strengthening economic ties, many currency swap agreements are aimed at settling short-term liquidity problems and coping with emergencies, analysts noted.

Ma said China's strict control over the capital account stands as a bottleneck that checks overseas companies' demand for holding the Chinese yuan.

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