China to start yuan-ringgit trading tomorrow

SHANGHAI, Aug 18 — China will begin trading in the yuan against the Malaysian ringgit from tomorrow, marking the latest step by Beijing to internationalise its currency.

The introduction of a sixth currency to trade against the yuan comes after the Chinese central bank said yesterday it would open the yuan bond market to funds accumulated overseas through trade settlement or central bank swaps.

The initiatives are part of a broader effort by Beijing to etch out a greater role for the yuan regionally, including stepping up its use in Hong Kong, leading to controlled, small openings of the capital account.

The step is meant to “promote bilateral trade between China and Malaysia, to facilitate the use of yuan in cross-border trade settlement and to reduce the costs of remittance to the economy,” the China Foreign Exchange Trading System (CFETS) said in a statement on its website.

China was Malaysia’s biggest trading partner in 2009 with total exchanges worth US$36.3 billion (RM116.2 billion). To allow exporters and importers to settle trade deals in ringgit and yuan, the two countries signed a currency swap agreement in February of that year.

CFETS, an interbank funding centre for banks, insurers, securities brokers and fund management firms, is responsible for managing the execution of forex trading. Its announcement today confirms what market sources told Reuters in July.

Yuan-ringgit rates will be set according to dealers’ bids, CFETS said. That stands in contrast to the euro, sterling, Japanese yen and Hong Kong dollar, which are quoted according to their dollar cross-rates.

The yuan will also have more leeway against the ringgit, being allowed to rise or fall by five per cent from a mid-point published each morning by the People’s Bank of China, the central bank.

The yuan may only rise or fall by 0.5 per cent a day against the dollar from the mid-point and three per cent against the other major currencies.

“It is a significant move because it means that the ringgit and yuan will have more convertibility into one another,” said Suresh Kumar Ramanathan, regional rates and FX strategist with CIMB Investment Bank in Kuala Lumpur.

“And since it will be based on dealers’ bids, it is more market driven, because generally Asian currencies have to convert to the dollar and then get converted into whatever currency you need.” — Reuters