Bank of China and Bank of Communications were the first lenders to clear transactions in yuan. Given China's expanding economy and huge presence in international trade this is considered to be an emerging lucrative business.

Three pairs of Shanghai companies with their Hong Kong and Indonesian counterparts signed contracts last month to be the first to settle business deals in the Chinese currency, also known as the renminbi.

Good for world trade

The deal marked a critical step for the yuan to become a world currency. China’s State Council announced in April a pilot program to allow exporters and importers in Shanghai, and southern Guangzhou, Shenzhen, Zhuhai and Dongguan cities to settle cross-border trade deals in yuan.

Amid the ongoing financial crisis, the new service is bound to help warm up international trade, further push the yuan around the globe and alleviate the world’s over reliance on the U.S. dollar.

As an essential step toward the RMB's internationalization, cross-border settlement is the result of China's rapid growth. “It will make it more convenient for exporters and importers to carry out trade and avoid the risk of exchange rate fluctuations.” said a manager of a Shanghai state-owned enterprise.

It’s roughly calculated that the enterprise suffered 2 billion yuan in costs caused by yuan appreciation. Caught off guard and partly lacking the skills to hedge against foreign exchange volatility, many small Chinese exporters have closed shop after China revalued the yuan by 20 percent against the dollar in July 2005. The yuan has appreciated by a further 19 percent against the dollar since then.

The cross-border yuan trade settlement is undoubtedly a piece of good news for traders and will boost trade among China's mainland, Hong Kong, Macao and regional trade partners such as the Association of Southeast Asian Nations (ASEAN).

Shanghai: global international center

The launch of the business in Shanghai was also an echo to Beijing's decision this year to make the Chinese financial hub a global international center by 2020 in what the government said would reflect the rising status of China's economy and its currency.

Cross-border settlement in yuan also provided a new development space for local financial organizations, with more customers and higher competitiveness. Yin Jianfeng, head of the Financial Structure Research Department under the Chinese Academy of Social Sciences’ Finance Research, said, “A world currency should possess the functions of international trade settlement and reservation. The development of Renminbi is closely linked with that of China’s economy and Shanghai’s position as an international financial center.”

The establishment and strength of Shanghai’s position as an international financial hub will undoubtedly benefit its satellite town – Huaqiao International Service Business Park.

By Xie Fang