【华尔街日报0228】China Takes New Step on Yuan Liberalization

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China Takes New Step on Yuan Liberalization http://online.wsj.com/article/SB10001424052970203833004577250960989566508.html


By LINGLING WEI            BEIJING—In a new move to promote the international use of China's currency,  banks in the southern Chinese city of Shenzhen have been given approval to launch cross-border yuan-remittance services for individuals, according to people familiar with the matter.
The move extends earlier liberalizations aimed at promoting the use of yuan in cross-border trade and investment.
                                           


In a directive dated Feb. 14, the Shenzhen branch of the People's Bank of China said a number of Chinese banks operating in Shenzhen will be allowed to offer the new service to all their individual customers in the city, according to people who have viewed the document.
The notice didn't say when the service would begin, these people said. The central bank declined to comment.
Shenzhen, which borders Hong Kong—a burgeoning center for yuan trading—was one of the first five cities allowed by Beijing to experiment with yuan trade settlement starting in 2009. The central bank extended that project to the entire country last year. Yuan-settled trade transactions more than tripled in 2011 from a year earlier, to 2.1 trillion yuan ($333 billion), according to the PBOC.
China has been slowly loosening its grip on capital flows as it strives to make the yuan, also known as the renminbi, a global currency.
"Yuan internationalization started first with allowing businesses to settle trade in the yuan. Now [authorities] are planning on bringing down the walls for individuals," a person familiar with the matter said. This person said the new move was a "natural progression" toward eventually setting the yuan free.
So far, yuan-settled trade transactions make up the vast majority of yuan funds moving across China's borders, though the yuan's use in investment is starting to make small gains.
Individuals, both Chinese and foreign, have few approved channels to send their yuan funds abroad or bring them back to China. They usually have to convert their yuan holdings into foreign currency first before remitting them offshore.
Banking executives say that, at least initially, demand for the new service will come mostly from mainland Chinese who plan to travel to Hong Kong, where the currency is widely used.
The Shenzhen directive applies to the local branches of Chinese banks, including Industrial & Commercial Bank of China Ltd., Bank of China Ltd., China Merchants Bank Co., Citic Group's Citic Bank, and Hua Xia Bank, the people with knowledge of the issue said,
The directive says that individuals can transfer across the border up to 80,000 yuan ($12,700) in funds per day through accounts with the Shenzhen branches of those banks. It is unclear whether authorities will permit repeated transfers over an extended period of time.
The southern metropolis of Shenzhen was the birthplace of China's experiment with capitalism, so reforms there gain national prominence.
PBOC officials have said recently that the central bank intends to further broaden the scope of cross-border yuan business as it pushes ahead with its drive to boost the status of the Chinese currency. In its fourth-quarter monetary policy report released on Feb. 15, the PBOC said it plans to "explore cross-border yuan business for individuals" while further improving the settlement system for yuan-denominated trade and investment.
China has been trying to give its currency a bigger role on the world stage without first opening up the capital account. By keeping a tight rein on fund flows, China maintains its ability to enforce ceilings on bank deposit rates, guide the amount of bank lending and ration access to its capital markets— all intended by Beijing to insulate the country's economy and financial sector from external shocks.
A bigger role for the yuan ultimately would require China to revamp its financial policies, including sharply reducing its exchange-rate intervention, liberalizing interest rates and relaxing restrictions on capital flows. Some Chinese officials recently have publicly urged Beijing to relax its capital controls to accelerate the global use of the currency.
Bank executives say they expect the fund flows by individuals in Shenzhen to be closely monitored by Chinese regulators, given that preventing speculative capital flows remains a priority for the regulators.
The State Administration of Foreign Exchange, part of the PBOC that serves as China's currency watchdog, said in a statement Mondaythat it will pay closer attention to swings in cross-border movement of yuan funds and curb hot money as capital flows continue to rise.



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