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January 13, 2011 2:21 PM EST
China announced on Thursday that the country's qualified enterprises could conduct direct investment overseas using renminbi, marking another key step towards the globalization of the Chinese currency.
The People's Bank of China (PBOC), or the central bank, said in a notice published on its website that banks and businesses would be allowed to use yuan internationally for launching new businesses as well as for mergers and acquisitions.
Moreover, domestic banks in China could offer those businesses loans for their overseas investment, and investment profits could be sent back to China in yuan. Related procedures would be more expedient, according to the new rules which took effect on January. 6.
The scope of the program, described as a pilot, will be limited, but carrying out it in an active and steady way could further push for renminbi's use for cross-border trade and investment, and better support Chinese enterprises working overseas, according to the notice.
"This is an important step to internationalise the renminbi," Dariusz Kowalczyk, a strategist at Crédit Agricole told Financial Times. "It's significant because this will provide an additional means for renminbi to flow out of China."
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One-third of China's cross-border trade might be settled in yuan by 2016 as the government pushes for the yuan's greater role in reducing reliance on the U.S. dollar, said Qu Hongbin, HSBC's chief economist for China.
"China's currency has been under-represented in global trade and capital markets, when compared to its trade and economic scale. But triggered by various government measures, yuan-settled trade has been growing fast," Qu was quoted in Wednesday's China Daily.
Chronolgy of settlement in RMB for cross border trades
Previously, settlement in RMB for cross border trades was only permitted between five pilot cities in mainland China, Hong Kong, Macau and the member countries of the Association of Southeast Asian Nations.
In June 2010, the People's Bank of China opened the program up to a further 20 provinces as well as countries around the world.
International banks including HSBC, JPMorgan Chase and South Africa's Standard Bank already offer renminbi trade settlement services across the world.
Hong Kong welcomes China's move as offshore renminbi center
Welcoming the move, the Hong Kong Monetary Authority (HKMA) Chief Executive Norman Chan said the scheme will further enhance the circulation of renminbi funds for trade and investment activities.
Upon implementation of the pilot scheme, banks in Hong Kong would be allowed to obtain renminbi from the mainland and for lending to Chinese groups making overseas investments.
In 2008 and 2009, the Mainland's outward direct investments amounted to US$55.9 billion and US$56.5 billion, of which 69% and 63% was invested in Hong Kong or through Hong Kong to other parts of the world, according to the HKMA.
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