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China To Begin Onshore Trading Of Russian Ruble Versus Yuan

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* NOVEMBER 16, 2010, 4:17 A.M. ET

2nd UPDATE: China To Begin Onshore Trading Of Russian Ruble Versus Yuan

SHANGHAI (Dow Jones)--China plans to launch trading of the Russian ruble against the yuan in the country's foreign-exchange market, China Foreign Exchange Trade System said in a notice Tuesday, in the latest step toward making the yuan a global currency and boosting its use for cross-border trade.

Beijing has been promoting the use of the yuan to settle commercial trade transactions and expanding the scope of yuan business in Hong Kong, though economists say it will take years for a significant amount of China's cross-border trade to be settled in the currency. Strict capital controls, the yuan's lack of full convertibility and the limited number of yuan-denominated investment products offshore are among the hurdles to making the currency more widely used.

An official at CFETS, the central bank division that oversees China's foreign-exchange market, said onshore yuan-ruble trading will begin by the end of November. However, the launch date isn't clear, nor is it clear whether the People's Bank of China will set a reference central parity rate to guide the pair's daily movements as it does for the other currencies the yuan trades against, said the official, who declined to be named.

The trading volume of the yuan against the ruble in China's interbank foreign-exchange market will likely be negligible initially, as is the case with the recently launched onshore trading of the Chinese currency against the Malaysian ringgit, mainly because the technical issues for such transactions are yet to be resolved, traders said, without elaborating.

"It's a small step together with the recent trend of renminbi internationalization, and more specifically, renminbi regionalization," said a currency strategist at a U.S. bank, referring to the yuan's other name. "The whole idea is to promote more usage among trade partners to actually use the renminbi as the means to settle trade," said the strategist, who declined to be named.

The plan to allow yuan-ruble trading in the onshore interbank foreign-exchange market comes after Xinhua News Agency reported in September that Chinese President Hu Jintao endorsed a Russian proposal to begin direct trading of the two currencies on each country's interbank foreign-exchange market.

Kevin Lau, a regional economist at Standard Chartered, said the bank doesn't expect the move to have an immediate impact on business conducted between Russia and China immediately as most of the cross-border trade will be denominated in the dollar for the foreseeable future.

Six currencies are currently traded directly against the yuan on China's interbank market: the U.S. dollar, the Hong Kong dollar, the yen, the euro, the pound and the Malaysian ringgit.

China added the ringgit to the short list of currencies it allows to be directly traded against the yuan on its interbank market in August, signalling its intent to begin opening up trading with emerging-market currencies.

For onshore yuan-ringgit trading, the People's Bank of China set a daily central parity, a reference exchange rate used to guide the pair's daily movements, and allows the pair to move as much as 5% above or below the central parity rate.

The yuan/ringgit trading band is wider than the permitted movement of 0.5% for the U.S. dollar-yuan pair and 3% for the euro, yen, Hong Kong dollar and the pound.

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