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China Said to Consider Yuan Trading Versus Ruble, Won (Update2)

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China Said to Consider Yuan Trading Versus Ruble, Won (Update2)

By Bloomberg News

April 7 (Bloomberg) -- China is considering allowing the yuan to trade against the Russian ruble, South Korean won and Malaysian ringgit to promote its use in cross-border trade, an official at the China Foreign Exchange Trade System said.

The People’s Bank of China is investigating the possibility of offering new currency pairs, said an official at the Shanghai-based interbank exchange, a subsidiary of the central bank. He asked not to be identified as authorities have yet to make a final decision. Traders now can buy or sell the yuan against the dollar, the euro, the yen, the Hong Kong dollar and the British pound.

“That would be a further step towards making the yuan an international currency,” said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co., the country’s fifth-largest lender by market value. “The move would help foreign companies buy or sell the yuan at lower costs.”

China is seeking greater use of its currency to reduce reliance on the U.S. dollar after Premier Wen Jiabao said last month he is “worried” about holdings of assets denominated in the greenback. From July, the government started allowing companies in Shanghai and four cities in the southern province of Guangdong to use yuan in cross-border trade with Hong Kong, Macau and members of the Association of Southeast Asian Nations.

President Barack Obama will keep pressing China to end the yuan’s 21-month-old peg to the dollar and may bring up the topic when he meets Chinese President Hu Jintao next week, spokesman Robert Gibbs said yesterday. Executives at Chinese banks have backed a stronger currency to allow it to play an increased role in global trade and spur growth in financial markets.

Critical Meetings

China’s currency has been held at around 6.83 to the dollar since July 2008, after appreciating 21 percent in the previous three years. Twelve-month non-deliverable forwards traded at 6.6355 per dollar, reflecting bets the currency will climb 2.9 percent from the spot rate of 6.8254 in the coming year.

The ruble was little changed at 29.3048 per dollar. Sergei Shvetsov, the head of the Russian central bank’s financial operations department, said yuan-ruble trading was unlikely to have any impact on his own currency’s value.

U.S. Treasury Secretary Timothy F. Geithner last weekend announced the postponement of the April 15 deadline for an annual foreign-exchange policy review, which may have resulted in China being labeled a currency manipulator. He said meetings over the next three months will be “critical” to bringing policy changes that lead to a more balanced global economy.

Opening Up

“They’re becoming more open to the world, and with that, you’re going to see the currency take on a broader role internationally,” Geithner said in an interview with Bloomberg Television to be aired today. “That’s a healthy, necessary adjustment.”

Expectations that China’s currency will appreciate drove yuan trade settlements to 7 billion yuan ($1 billion) in the first two months of this year, almost twice the 3.6 billion yuan in the second half of 2009, Zhang Yanling, vice chairman of Beijing-based Bank of China Ltd., the nation’s biggest foreign- currency lender, said in a March 19 interview.

“If the yuan is expected to be a strong currency, neighboring countries will prefer to hold the yuan instead of the dollar,” she said.

Mounting Reserves

Since December 2008, China has set up 650 billion yuan worth of swap agreements with Indonesia, Malaysia, South Korea, Hong Kong, Belarus and Argentina, broadening access to the yuan. The central bank has also proposed expanding the use of International Monetary Fund depository receipts in reserves instead of dollars.

“They’re trying to encourage yuan trade settlement, so it would make sense to commit to more trading pairs,” said Ben Simpfendorfer, Hong Kong-based chief China economist at Royal Bank of Scotland Group Plc. “It would be a natural part of the growing convertibility of the yuan and a step towards widening the use of the yuan. Convertibility of the yuan is a long-term change, but China is taking all the right steps.”

China’s dollar purchases to maintain the currency link have driven currency reserves to $2.4 trillion. Chinese investors held $889 billion of Treasuries in January, the biggest overseas holdings of such debt.

It will take 15 to 20 years to make the yuan an international currency, Dai Xianglong, chairman of the National Council for Social Security Fund and a former central bank governor, said April 2.

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