China Daily reports that Shanghai may start yuan settlement trials.
(emphasis mine) [my comment]
Shanghai may start yuan settlement trials
By Zhou Yan
Shanghai will likely join the second batch of yuan-settlement trials with some neighboring trade partners to tackle the export slowdown, according to local authorities.
"We worked on the proposal for the pilot program with related departments which would be submitted to the local government and the State Council for approval," said Zhao Kangmei, vice-chairman of Shanghai Municipal Commission of Commerce (SMCC).
The State Council, the country's cabinet, last December announced it would use the Chinese currency yuan for trade payments between Guangdong province and the Yangtze River Delta and the special administrative regions of Hong Kong and Macao, an attempt to make yuan an international currency. [When the yuan becomes a full-fledged international currency, it will be a much more attractive reserve currency then the dollar. Central banks will therefore start shifting their reserves into yuan, decimating the dollar' s value.]
The Guangxi Zhuang autonomous region and Yunnan province will also be allowed to use the yuan in transactions with members of the Association of Southeast Asian Nations (ASEAN) in 2009.
"During the financial turmoil, some large engineering contract projects have suffered huge losses when being paid in US dollars, which have become more volatile amid the economic meltdown. Hence, companies are strongly clamoring to introduce Chinese currency for trade settlement," Zhao said.
Shanghai planned to make the yuan for settlement in some large projects in ASEAN, Hong Kong and Macao, as well as Russia, to lock in risks. And 18 local companies have been chosen on a trial basis, he added.
The steps are even more crucial now that Shanghai's exporters have seen their overseas trade opportunities continue to shrink.
Sha Hailin, chairman of SMCC, said the growth rate of the import and export volumes of foreign-owned enterprises in Shanghai, which are two-thirds of the city's total import and export amounts, are expected to drop 30 and 40 percent respectively this January.
"The losses on foreign exchange transactions have partly eaten into Chinese exporters' profit in foreign trade. And to use the yuan-settlement will help domestic companies shun the exchange rate risk," said Sun Lijian, a finance professor from Fudan University.
He added that the yuan will become strong when its real economy starts to recover.
"It's the best option for Chinese companies to pay and settle with yuan."
However, Sun said that as Chinese currency has yet to be settled in accordance with market demand, there are still obstacles ahead.
My reaction: Here are the key points to take away from this article:
1) The fact the China is starting a second batch of settlement trials shows how quickly authorities are moving towards making the yuan an international currency.
2) In the very near future, as China keeps expanding its settlement trials, most of its international trade will be settled in yuan, not dollars. This is a huge deal. Two of the (only) characteristic that make the dollar attractive as currency is that it can be used to buy oil and cheap consumer goods with China. Once China switches to settling trades in yuan, it will greatly undermine the utility of the dollar.
3) When the story broke about *****China making Yuan an international currency*****, I wrote that, “It is apparent that Chinese exporters are screaming at their government to internationalize its currency so they can bill in yuan.” This is the first article I have seen that confirms my suspicions:
A) Some Chinese companies "suffered huge losses when being paid in US dollars.”
B) These companies are now "strongly clamoring to introduce Chinese currency for trade settlement,"
4) Having its international trades settle in yuan is a necessary precondition for China to break its dollar peg. Right now, if China broke its dollar peg while its trade with America is still settled in dollars, Chinese exporters would incur huge losses, decimating the sector. However, once China takes the big step of allowing trades with America to be settled in yuan, it is US' s importers (ie: Wal-Mart) which will be decimated by huge losses on their contracts with China. Given how weak American retailers are right now, this event could wipe out most of the sector.
5) When the yuan does finally become a full-fledged international currency, it will immediately become one of the world' s biggest reserve currencies. Central banks around the world dump their US holdings to buy yuan, and the dollar' s purchasing power will crash.
Conclusion: China is moving fast on its efforts to internationalize its currency. Watch for a move in the near future by Chinese authorities to allow trade with the US to be settled in yuan. This event will mean that China is on the verge of breaking its dollar peg and dumping their dollar holdings.