Move part of China's efforts to expand overseas yuan use
China will give a 250 billion yuan ($38 billion) investment quota to the U.S., the vice governor of China's central bank said Tuesday as part of the nation's efforts to expand the use of the yuan overseas.
This is the first time China has granted an investment quota to the U.S., which is expected to allow foreign institutional investors to use offshore yuan in China's domestic securities markets.
The quota will be allocated under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, Yi Gang, vice governor of the People's Bank of China (PBOC), told a press conference on Tuesday during the eighth round of the U.S.-China Strategic and Economic Dialogues (S&ED).
In addition, China will set up a yuan clearing bank in the U.S., said Yi.
At a press conference Tuesday, U.S. Treasury Secretary Jack Lew said the ability to do yuan transactions in the U.S. will really be an advantage for companies, for small firms in particular.
He said the two sides have agreed in principle on the yuan clearing bank in the U.S.
"There has to be an institution that is interested and there has to be regulatory approvals, but the door has been opened, so that process could now begin," Lew said.
Analysts said the move will help broaden the use of the yuan in North America, which is among a handful of regions that have yet to support yuan clearing.
As of the end of May, the State Administration of Foreign Exchange granted a total of 502 billion yuan in RQFII quotas to economies including the UK and France, with the Hong Kong market getting the highest share of 270 billion yuan.
The use of the yuan in settlements is becoming a new trend in some developed regions, with the yuan used more frequently in some emerging markets in Asia, E Zhihuan, a member of the Academic Committee of the Beijing-based International Monetary Institute, told the Global Times on Tuesday.
In March, the amounts settled in the London yuan clearinghouse rose by 21 percent compared to the same period two years ago, said E, citing data from SWIFT.
"We think that market demand plays a dominant role in the whole yuan internationalization process," the PBOC's vice governor said.
"If we can use the currency for investments it will be more effective and would reduce financing costs for companies," he said.
Interest rate watch
Yi added that the PBOC is prepared for the U.S. Federal Reserve's potential interest rate hike.
The central bank is evaluating "the pace and intensity" of the U.S.' second round of interest rate hikes, and "we have a lot of time to prepare … talks between the PBOC and the U.S. Federal Reserve are always very good and effective," said Yi.
The Fed raised interest rates in December 2015 after nearly a decade. Some Fed policymakers believe that its benchmark federal funds rate should be raised either in June or July if the U.S. economy further improves.
On Monday U.S. time, Federal Reserve Chair Janet Yellen set a positive tone for the U.S. economy despite May's disappointing U.S. jobs report.
Yellen was quoted by media as saying at an event in Philadelphia that the Fed needs to raise rates, but that it should be done "gradually." She did not provide a time frame.
The possibility of new interest rate hikes gained much attention at this year's S&ED. During Monday's talks, China's Minister of Finance Lou Jiwei raised concerns about the issue.
Raising interest rates would have an impact not only on China but on other markets as well, including the U.S., Lou said.
The value of the Chinese yuan plunged to a five-year low against the U.S. dollar in late May, as the greenback continues to strengthen on expectations of an interest rate hike. In May, China's foreign exchange reserves decreased by $27.96 billion to $3.19 trillion, the lowest level since December 2011, official data shows.
Still, a report issued by the China Foreign Exchange Trade System (CFETS) on Tuesday said recent major indexes have suggested a stable yuan exchange rate.
Both the CFETS yuan exchange rate index and the index for the yuan's value against a trade-weighted basket after inflationary adjustments issued by the Bank for International Settlements inched up 0.03 percent and 0.39 percent, respectively, in May compared to the end of April.
The yuan exchange rate is stabilizing, as the market begins to understand China's current exchange rate regime, which allows the yuan to fluctuate based on market forces as well as on a daily reference rate against a basket of currencies, said Yi.
