Prime Minister Abhisit Vejjajiva, fearful of the effects of the soaring baht due to massive capital inflows, has proposed the use of the Chinese yuan as a major regional trading currency.

Asia-Pacific leaders will have to discuss measures to deal with the fund inflows after the Group of 20 major economies failed to reach any tangible decisions, Mr Abhisit said yesterday.

The G20 did not make any progress on the matter and it is difficult to get the United States and China to express their clear stances on the issue. But what we can do is try to cooperate in the region and reduce the impact from currency volatility

Mr Abhisit said before leaving for the Asian Games in China and an Asia-Pacific Economic Cooperation Apec leaders’ meeting in Yokohama, Japan, this weekend.

foreign currencies
Mr Abhisit said he was optimistic that his idea of using yuan as a major trading currency in the region could materialise as the issue was discussed during summit of the Association of Southeast Asian Nations (ASEAN)

Mr Abhisit said he was optimistic that his idea of using yuan as a major trading currency in the region could materialise as the issue was discussed during summit of the Association of Southeast Asian Nations (ASEAN) in Hanoi in late October.

Mr Abhisit echoed a call made by the Asian Development Bank ADB to use China’s yuan as a major trading currency in the region to reduce the impact of currency volatility, especially linked to the weakening of the US dollar. He said he was the one who proposed the idea to the ADB.

Most Asian currencies undervalued to export more easily

The country has been most successful in this way is China, which has now earned enough foreign exchange reserves : about $ 1.3 trillion, which are also often invested in government bonds ( mainly U.S. Treasuries). To remain competitive vis-à-vis China, most Asian countries have therefore agreed to some undervaluation of their currencies to stay in line with that of the Chinese Yuan

The key player is China

Asean statistics show the trade value between the regional grouping and China increased from US$59.6 billion (Bt1.98 trillion at today’s rate) in 2003 to $171.1 billion in 2007, a growth rate of about 30 per cent a year.

The key player is China, which has the largest surplus. Additionally, other East Asian countries are rationally reluctant to adjust their currencies absent a Chinese revaluation, as they fear losing competitiveness. This means China’s refusal to significantly revalue its currency against the dollar is forcing a lop-sided adjustment process that places the burden of rebalancing the US trade deficit exclusively on Europe. That is imposing a deflationary burden on Europe that could easily undermine the European economy.

Since may 2009 China has paved the way for international companies to issue securities in its currency for the first time, telling two foreign commercial banks this week they have its backing to sell yuan-denominated bonds to overseas investors.

The China units of London-based HSBC Holdings PLC and Hong Kong’s Bank of East Asia Ltd. each confirmed have been granted permission by authorities in China to launch international bonds denominated in yuan. The banks fund their China-incorporated banking networks, which are the two largest among foreign banks operating in the world’s most populous nation.

Several overseas banks including HSBC Holdings Plc, Standard Chartered Plc and the Bank of East Asia have already submitted their applications for investment quotas on the mainland’s interbank market, the Shanghai Securities News reported Tuesday.

China’s central bank is receiving applications and may release the list of the first batch of overseas banks that are allowed to invest in yuan bonds after the National Day holidays, according to the paper.

Hong Kong has become a platform for China to spread the use of its currency abroad, issuing increasing volumes of yuan-denominated bonds.

McDonald’s Corp., was the first foreign firm which yo launch yuan bonds in Hong Kong, has seen strong demand in Asia’s financial hub.

The US fast-food rose 200 million yuan (HK$228.86 million) through the issue of three-year bonds, said Standard Chartered Bank, the sole arranging bank for the move.

The bonds were welcomed by institutional investors in Hong Kong and overseas, local media Standard reported, citing Sundeep Bhandari, StanChart’s regional head of global markets, Northeast Asia as saying.

The bond issue, though relatively small, will strengthen Hong Kong’s status as a yuan offshore center, Bhandari said.

With the funds raised, MacDonald’s will provide working capital to support the growth of McDonald’s in China, including the opening of restaurants

Boris Sullivan

Related readings:
Bond opening to boost yuan
China opens bond market to overseas RMB funds
Bank of China plans bond sale
HK’s government bond issue over-subscribed

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