Using the Chinese yuan to settle trade transactions gives U.S. companies negotiating power in deals with their Chinese suppliers and buyers, said Henry Yu, managing director for Standard Chartered (China) Bank Ltd. in Shanghai.
By helping the Chinese customer avoid currency-exchange fees, the U.S. firm gains room to ask for a higher price for a product sold or a lower price for one purchased, said Mr. Yu, who will return to Atlanta Nov. 1 to speak at the U.S.-China Business Conference.
While it’s the largest holder of U.S. treasuries, China has steadily voiced the need for the global economy to move away from the dollar as the primary trading currency. Last year, Chinese leaders called for the creation of a “super-currency” that would supplant the dollar in that role, tacitly admitting that their own currency wasn’t ready for widespread use in global markets.
China is slowly enacting measures to remedy that problem through a process of commercialization, encouraging use of the yuan in certain cross-border transactions.
“I can certainly tell you that the government is trying to convey the message that China wants to get its assets away from the U.S., so clearly commercialization … is based on economic reasons,” Mr. Yu told GlobalAtlanta in an interview in Shanghai.
Last year, the Chinese government started a program in five cities that allowed trade deals with Hong Kong, Macao and 10 Southeast Asian countries to be settled in yuan. In June, that program was expanded to 20 Chinese provinces, and the geographic limitation was removed, Mr. Yu said. Already, Chinese companies are using the yuan for major deals in African nations and other less-developed countries.
As President Obama seeks to double U.S. exports over the next five years, he should encourage American firms to use the yuan in some cases when dealing with Chinese partners, removing the conversion process, which can be a “pain in the neck” for Chinese sellers, Mr. Yu said.
“Basically, the Chinese seller gets the money faster, and you don’t have to convert,” while the U.S. firm gets leverage on pricing because he’s making the transaction cheaper and more convenient, said Mr. Yu, a former president of the National Association of Chinese-Americans in Atlanta.
The commercialization process is meant to accelerate the accession of the yuan as a global reserve currency, though that goal is still about two decades away, said Mr. Yu.
China is taking “baby steps” toward reaching that designation, which is usually contingent on two criteria. A currency must be attached to a major economy that holds sway in global markets, and it must have an advanced debt-equity market. China has the former but lacks the latter, Mr. Yu said.
“They still have an equity market, but it’s controlled. On the debt side, in the U.S. and Europe, mature debt market means that companies of any size that are in at least good financial condition, they are able to issue bonds,” he said. In China, it’s only sovereign government funds that enjoy that privilege.
Some U.S. regulators would applaud any measure that helps boost the value of the yuan. Many say that the yuan is significantly undervalued, giving Chinese exporters a price advantage in world markets that contributes to the U.S. trade deficit with China.
Mr. Yu left SunTrust Banks Inc. three years ago to work with Standard Chartered, one of few foreign banks licensed to perform RMB commercialization services in China. To learn more about currency issues in China, hear Mr. Yu speak at the upcoming NACA conference Nov. 1, which covers a variety of topics about doing business in China. Click here to register.