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Last updated: January 13, 2011 7:12 pm
China took a further step towards increasing its currency’s global role, allowing domestic companies to move renminbi offshore for investment purposes.
The shift came as the People’s Bank of China allowed the currency’s daily trading reference point to strengthen through the Rmb6.6 per dollar level for the first time on Thursday, a day after Tim Geithner, US Treasury secretary, reiterated concerns about China’s currency policy.
The renminbi, which many of China’s trading partners believe is undervalued, will feature in discussions next week between Hu Jintao, Chinese president, and Barack Obama, his US counterpart, in Washington.
Companies have been allowed to use the renminbi to settle international trade transactions since July 2009, under an initiative to reduce Beijing’s reliance on the US dollar.
According to the PBoC, mainland companies can now use the renminbi to launch businesses overseas and fund acquisitions.
“This is an important step to internationalise the renminbi,” said Dariusz Kowalczyk, a strategist at Crédit Agricole. “It’s significant because this will provide an additional means for renminbi to flow out of China.”
While there is no stated limit on the size of investments, Chinese companies will still have to apply for government approval to send renminbi offshore – just as they must do for investments settled in foreign currencies.
“It will be interesting to see if the foreign sellers of companies that the Chinese want to buy will be willing to accept renminbi,” Mr Kowalczyk said.
Foreign companies have few ways to use renminbi besides buying goods from China, depositing it in low-yielding accounts and bonds, or swapping it into other currencies. China maintains strict controls on investment from abroad.
Trade settled in renminbi totalled Rmb340bn ($51bn) between June and November, according to the PBoC – from zero just a year and a half ago.
According to bankers, the government is encouraging large state-owned enterprises to make acquisitions in renminbi rather than other currencies.
Hong Kong has a small but fast-growing market for renminbi-denominated financial products that is open to international investors.
China is trying to turn the renminbi into a global currency for trade without abandoning controls on the movements of capital – a balancing act that economists say will prove increasingly difficult as the renminbi accumulates offshore.
Additional reporting by Alan Beattie in Washington
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