China took a new step on Tuesday to promote the use of the yuan beyond its borders, a strategic initiative to raise the global profile of the currency while retaining capital controls to shield its economy from speculators.
China will allow yuan accumulated overseas as a result of trade settlement or central bank swaps to be funneled back into the mainland's interbank bond market, the People's Bank of China said on Tuesday.
The central bank said the move aimed to boost China's fledgling program to encourage the use of the yuan in settling trade, thus broadening the international role of the currency.
Economists have identified a paucity of investment outlets as one obstacle in the way of a faster build-up of yuan balances under a year-old scheme to invoice and settle imports and exports in yuan, also called the renminbi, rather than dollars.
"So far, progress has involved allowing renminbi that is already offshore to do whatever is wanted, so long as it doesn't flow back into China. Now it has taken it one step further, and that is to open a small channel that allows some of the offshore yuan to flow back into the mainland system," said Kelvin Lau, an economist with Standard Chartered Bank in Hong Kong.
He said the announcement was a small step in the right direction - a natural progression.
"This creates more usages for the renminbi in Hong Kong and outside of mainland China, so it is the right step to try to create more usages for the yuan and therefore create more demand for the yuan," he said.
In a statement on its website, the central bank said three kinds of financial institutions would be permitted to invest surplus yuan in the mainland's interbank bond market: yuan clearing banks in Hong Kong and Macau; foreign central banks that have signed yuan swap agreements with China; there are seven to date, totaling just over 800 billion yuan.
Overseas banks involved in yuan cross-border trade settlement; the scheme was extended in June to every country in the world and, inside China, to 20 provinces and cities with provincial status.
"In a sense, it is a very small opening of the capital account given that it really does allow money to go into the capital market, the bond market in this case. But for the money to leave China in the first place, it is through trade or through swap lines, which is a very managed way," Lau said.
© 2014 Thomson/Reuters. All rights reserved.