China Launches Pilot Program for Yuan Trade Settlement

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The central bank has published rules governing trials for settling trade in China's currency, the yuan, officially kicking off a program proposed earlier this year.  

The rules, released by the People's Bank of China on July 2, are effective immediately, and call for the selection of qualified firms in specified regions to participate in the pilot program.  

The selected firms can choose clearing banks in Hong Kong and Macau as well as domestic lenders to act as agents for foreign banks seeking to settle trade in yuan, the central bank said.

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The PBOC, in conjunction with the Hong Kong and Macau monetary authorities, designated Bank of China's Hong Kong-listed unit as the clearing bank for the two special administrative regions.  

Clearing banks are also allowed to offer yuan cross-border settlement and clearing services to clients from Hong Kong, Macau and the ASEAN nations included in the pilot program.  

Exporters receiving payment in yuan will still be eligible for tax rebates, but they no longer need to provide foreign exchange verification documents issued by the State Administration of Foreign Exchange when applying for the rebates.

The State Council approved the yuan settlement pilot program on April 8. It will link five mainland cities - Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan - to Hong Kong and Macau.  

However, the scheme's implementation was delayed as transactions will be handled by the State Administration of Taxation rather than the State Administration of Foreign Exchange. The shift in supervision required the drafting of new tax rebate guidelines.

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BOC Hong Kong Ltd. research chief Xie Guoliang told Caijing that almost all the Hong Kong local banks had reported strong demand for yuan settlement services.  

Both companies and lenders in Hong Kong welcome China's moves in signing currency swap deals with other countries, said Xie, adding the yuan settlement pilot program is a "very good auxiliary measure" that complements the swap agreements, China has recently signed six such deals worth a total of 650 billion yuan with regions and nations including Hong Kong, Indonesia and Malaysia.

Xie said that the volume of transactions settled in yuan will initially be small as all the lenders, firms and regulators involved take tentative steps to test the program during the initial phase.  

Bank of Communications chief economist Lian Ping also said that the volume and scope for yuan settlement will be limited in the preliminary period, adding that the "the key is to see if the implementation of the program can effectively push up market demand."

People familiar with the situation also told Caijing that the central bank is planning to set up a new regulatory unit to manage the pilot program, as well as efforts to boost the internationalization of yuan.

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The talks ended with an agreement followed by a public announcement June 12, during which Ping An (SSE: 601318; HKSE:2318) and SDB (SZSE: 000001) jointly unveiled a share subscription agreement that lets the holding company's subsidiary Ping An Life acquire at least 370 million -- but no more than 586 million -- new shares in the bank.

The deal, which followed a week of suspended trading for Ping An stock, will raise at least 6.7 billion yuan, and as much as 10.7 billion yuan, for the Shenzhen bank.

The dealmakers also agreed that, by the end of 2010, Newbridge would have the option to sell 520 million shares in the bank to Ping An for 11.45 billion yuan, or exchange the stock for 299 million new, Ping An H shares.

The deal is more than financially significant. TPG was the first international investor with a controlling stake in a mainland commercial bank, and SDB was the first Chinese commercial bank to go public.

Ping An, one of the nation's largest insurers, operates a small bank but has waited a long time for a major banking license as part of its quest to become a universal financial holding company. With a market value of 250 billion yuan, Ping An is already ranked the world's 18th largest financial institutions by market capitalization.