Cross-border yuan settlement surges

The yuan is now being used more often in cross-border settlements, although challenges still remain.

China's central bank, the People's Bank of China (PBOC), highlighted the role of southwest China's Yunnan province in stimulating yuan-denominated business at the China-South Asia Expo, which opened Thursday in the provincial capital of Kunming.

Yunnan saw its cross-border yuan settlement hit 46.1 billion yuan (7.3 billion US dollars) in 2012, a local official said Friday.

Six commercial banks in Yunnan have signed settlement agreements with their counterparts in nine countries, including Vietnam, Laos, Thailand, Myanmar and Singapore, said Liu Guangxi, director of the provincial financial office.

Li Zezhi, deputy director of a yuan settlement group at the Yunnan branch of the PBOC, attributed the settlement surge to strengthened investment abroad.

However, there are still obstacles in promoting cross-border yuan settlement, Liu explained.

As a key area for enhancing yuan-denominated activity conducted with South Asia, Yunnan has had problems related to backflow, cash limits and policy support.There is still a lack of channels for purchasing the yuan, as it suffers from a higher cost overseas due to the prevailing use of the US dollar in settlements between China and neighboring countries.

The maximum amount of cash one is allowed to carry when entering and leaving China is 20,000 yuan, restricting the currency's popularity.

Currently, the yuan is convertible for trade purposes under the current account, while the capital account, which covers portfolio investment and borrowing, is still largely controlled by the state over concerns of abrupt capital flows moving in and out of the country.

The central bank on May 2 unveiled a guideline for foreign investors' yuan-denominated activity in mainland equity markets, moving a step closer in opening the country's capital markets and promoting the yuan's overseas use.

The guideline on the implementation of the Renminbi Qualified Foreign Institutional Investor (RQFII) pilot scheme is part of PBOC's latest efforts to regulate a potentially booming market with the backflow of yuan from overseas.

China launched the RQFII program in December 2011, initially allowing a maximum of 20 billion yuan in exchange-traded funds raised offshore to be invested in the domestic capital market. It has gradually raised the total RQFII investment quota to 270 billion yuan in domestic capital markets.

Xiao Gang, the new chairman of the China Securities Regulatory Commission, is expected to further open the market to international investors by expanding the RQFII program.

Yum Sui Sang, president of Cambodian Union Commercial Bank, said yuan-based settlement is an inevitable trend in the Greater Mekong Sub-region (GMS).

The GMS is a natural economic area bound by the Mekong River. It covers 2.6 million square km and is home to around 326 million people in Cambodia, Vietnam, Myanmar, Laos, Thailand and China's Yunnan Province.