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China Now Allowing Some Companies to Settle Trade in Yuan

Some companies in Hong Kong, Macau and Southeast Asia can now do business in China's currency, in the latest move to internationalize the yuan. A new program allows some importers and exporters to settle trade in China's currency, the yuan, beginning this week.

Kelvin Lau is the regional economist at Standard Chartered Bank Hong Kong. He says the agreement allows businesses in Hong Kong, a Chinese territory, to carry out more business in the yuan, or CNY, and this should help earnings.

"All these will help Hong Kong to complete its business capability and to achieve the longer term goal of being China's offshore CNY financial center," he said.

Lau says this is a step toward making the yuan a reserve currency in Asian banks.

It also should cut foreign exchange costs for exporters and importers, who before had to settle trade deals with Chinese companies in foreign currencies, usually dollars.

The People's Bank of China and the Hong Kong Monetary Authority agreed on the program last week. It permits Hong Kong companies to trade in yuan in five Chinese cities: Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai.

The program also allows some companies in the Chinese territory of Macau and in Southeast Asian nations to settle trade in yuan.

The Bank of China in Hong Kong conducted the first cross-border yuan trade settlement with the Bank of China in Shanghai on Monday. The Bank of China is the country's largest foreign exchange bank.

Lau says the program's is likely to have only a marginal effect on business for now.

In 2003, Hong Kong banks were permitted to take yuan-denominated deposits and exchange yuan for Hong Kong dollars. At present, more than 50 billion yuan is deposited in Hong Kong banks.

Because of the global economic crisis, China has complained this year about the U.S. dollar's role as the world's dominant reserve currency. The dollar has fallen in value against other currencies, reducing the value of China's vast foreign currency reserves, most of which is in dollars.

However, many economists and foreign exchange experts note that since China closely controls the yuan's exchange rate, and has not made the currency fully convertible in international markets, it has limited room to shift away from the dollar.