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One side effect of the latest financial crisis is that it has accelerated the progress of the yuan (CNY) to becoming a major global currency, which is good news for Thailand and China’s other Southeast Asian trading partners.
Plans to make the yuan a convertible currency were already well on track before the crisis, with the introduction of two important initiatives by China last year – “dim sum” bonds and gradual loosening of the peg to the US dollar, which will allow the Chinese currency to appreciate.
“Dim sum” bonds are yuan-denominated bonds that are issued by foreign firms in Hong Kong. Despite generally paying less interest than bank deposits, they have proved very popular as they are a means to tap into China’s growth, take advantage of yuan appreciation and hedge currencies.
Given the recent difficulties with both the dollar and the euro, the rise of the yuan is most timely as it meets the demands of central banks and private investors for alternatives that will help them to diversity their investments and balance their risks.
The growing acceptance of the yuan as a trading currency
Other important developments this year that have helped the growing acceptance of the yuan as a trading currency have been the establishment of a secondary market in yuan bonds and further liberalization of the yuan-denominated bond market. Exchange-traded funds holding Hong Kong-listed stock are now able to be sold in mainland China and more international investment options in the yuan are being made available to Chinese investors.
The expanding role of the yuan will be of benefit to both investors and traders. In Thailand, for example, there is a strong and growing appetite from investors for foreign funds. Funds that invest in yuan-denominated bonds will be welcomed by these investors as they will help diversify and deepen the market.
Benefits for importers and exporters doing business with China
The benefits may be even greater for those importers and exporters doing business with China as they will be able to make and receive payments without having to use the USD as an intermediate currency. They will also be able to diversify their own investments by holding yuan-denominated bonds as an alternative to dollar bonds and can hold yuan as a hedge against risk.
In recognition of this trend and to provide its customers with new opportunities, Bangkok Bank recently introduced a full range of services in yuan, including letters of credit, funds transfers, currency exchange and foreign-currency deposit services.
Southeast Asian economies such as Thailand should be among the greatest beneficiaries of the strengthening yuan, which will be a natural consequence of its growing use as a trading currency. Trade between China and ASEAN is growing by around 20 percent a year and already tops $100 billion. A stronger yuan will help shift the balance of trade towards Southeast Asia, whose members’ currencies appreciated when the yuan was pegged to the dollar, as without this pressure their exports will become comparatively cheaper.
Already there is strong interest among Southeast Asian economies in trading using the yuan, which some expect to become one of the top three global currencies alongside the dollar and the Euro.
For more columns in this series please see www.bangkokbank.com
via Rise of the yuan.