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Local use of yuan likely to rise

Local use of yuan likely to rise

A 100 yuan bank note next to a US$100 note. China would make the yuan more flexible in either direction and currency reforms have begun to achieve results, Premier Wen Jiabao said this month.

WHILE several Cambodian banks will soon offer cross-border remittance services in Chinese yuan, experts and bankers say the Kingdom’s close economic ties to China may prompt a rapid increase in the domestic use of the currency.

Cambodia’s Union Commercial Bank recently reached an agreement with the Industrial and Commercial Bank of China for clearing and settlement transactions in yuan, UCB chief executive Yum Sui Sang said.

The bank planned to offer yuan remittance by the end of this year as demand for the service was evident, he said.

“I genuinely believe the time is ripe for the internationalisat-ion of the yuan,” Yum Sui Sang said. “I have witnessed stronger and stronger demand for the yuan as a clearing and settlement currency, especially here in Cambodia.”

Despite preferential Chinese policy slowly edging traders towards cross-border settlements in yuan, its usage abroad is still highly regulated.

In July, 2009, the Chinese government allowed companies in Shanghai and Guangdong to settle trade with ASEAN nations in yuan.

The policy became all-inclusive less than a year later, and came to include an up to five per cent export tax rebate for Chinese companies that settled accounts in their own currency.

The Chinese government limits personal cross-border transactions to about US$12,500 at current exchange rates, according to the Bank of China website. Transactions for registered companies abroad are unlimited but require letters of credit from recipient companies in China.

Early next year, the Cambodian Public Bank will also offer settlement services, according to country head Phan Ying Tong, who said the volume of business between the two countries would make settlements in yuan commonplace.

“There are a lot of products being imported from China right now, so the increase in this service in Cambodia would be huge,” Phan Ying Tong said last week.

The bank’s research has shown there are as many as one million Khmer-Chinese in the Kingdom, as well as about 50,000 people who hold Chinese passports.

Government-brokered deals aside, trade between domestic Chinese and mainland businesses would only continue to grow, Phan Ying Tong said.

Remittance in yuan, as opposed to the dollar, would also save both parties at least 0.4 per cent on exchange rates, he added.

Total trade between Cambodia and China was expected to reach $2 billion this year and $2.5 billion in 2012, Minister of Commerce Cham Prasidh said in October.

Bilateral trade was worth $1.44 billion in 2010, Ministry of Commerce data showed.

ANZ Royal Bank said in July it would also offer yuan payment services, but company officials were not immediately available for comment.

Nguon Sokha, director-general and spokeswoman at the National Bank of Cambodia, said small yuan remittances to China were already happening at Cambodian banks with strong connections to China.

The volume of such transactions was sure to increase, given recent business trends between the countries, she said.

“There’s lots of co-operation between the two countries, so future transactions will be very big,” Nguon Sokha said, adding that many Chinese suppliers still preferred dollars.

The Chinese government is a big lender to Cambodia, second only to the Asian Development Bank.

Chinese concessional loans to China as of October were worth $1.16 billion – more than 29 per cent of the Kingdom’s total concessional debt, according to data compiled by the NGO Forum.

China’s interests in yuan lending to Cambodia is a topic of debate among experts.

“It makes sense to hold reserves of the currency that you owe the most,” Jonathan Leightner, an Asia specialist and economics professor at Augusta State University in Georgia, said.

“It also makes sense for Cambodia to hold yuan instead of dollars as its foreign reserves.”

Cambodia could protect itself from future appreciation of the yuan by switching dollar- denominated loans to those calculated in yuan, according to Leightner, who formerly taught at the Johns Hopkins-Nanjing Centre in Nanjing, China.

Before the 1997 Asian financial crisis, Japan encouraged debtors to switch from the dollar to the yen, Leightner added.

The suggestion fell largely on deaf ears and, when the yen appreciated against the dollar, borrowing countries found themselves subject to increasing levels of debt.

China has been under increasing pressure to allow its currency to freely appreciate against the dollar. The People’s Bank of China stops the yuan from rising or falling 0.5 per cent against the dollar past a daily set exchange mark, regardless of demand for the currency.

China and Cambodia’s exposure to the US dollar – in terms of foreign reserves and, for Cambodia, its usage as the default national currency – made continued dollar settlements an attractive option for both countries, Jayant Menon, principal economist at the Asian Development Bank’s Office of Regional Economic Integration, said.

Still, the potential for long-term appreciation against the dollar reduced uncertainty for traders in the two countries when accounts were settled in yuan, Menon said.

Exposure to the yuan should offer a counter-balance to a depreciating and volatile US dollar, he said.

The relative scale of the Cambodian economy could also let yuan settlements go under the radar, despite China’s reticence about international exposure of the currency, Menon said.

“Cambodia, being a rather small economy, can probably still get away with using some [yuan] without having any major impact on the international volume [of the currency].

“In that sense, it could probably do more yuan invoicing without it much being noticed.”

The global role of the yuan was still subject to much speculation, given the expected change of leadership in China next year, Leightner said.

Despite the small steps in internationalising the yuan under President Hu Jintao, China’s fifth generation of leaders might not have the same policy goals, he said.

“I believe that having the yuan replace the US dollar is the goal of some policymakers in China.

“Whether these policy makers will dominate, I do not know,” Leightner said.


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