Bank of China (BOC), the country's third largest lender, has been selected as the settlement bank for a pilot program that allows part of the regional trade to be settled in renminbi.

A formal announcement on the bank's role in the program would be made before the end of this month, said a BOC source.

China's State Council, the cabinet, announced plans to begin yuan settlement trials with some economies in December 2008.

The program would permit the use of the yuan in trade between the Chinese regions of Yunnan and Guangxi with the Association of Southeast Asian Nations (ASEAN).

The Pearl and Yangtze River delta regions would also be permitted to use yuan for settlement for trade with the special administrative regions of Hong Kong and Macao.

"Bank of China's experience in international trade settlement made it the perfect choice for this program," said Hu Jianjun, analyst, Hongyuan Securities. Before 1994, all foreign currency exchange and international trade settlement had to go through BOC.

Official figures showed that China's exports plummeted by 17.5 percent from a year earlier, the most in 13 years, in January.

The currency program is expected to protect mainland exporters from the impact of exchange rate fluctuations and boost trade with business partners from the ASEAN, Hong Kong and Macao.

Due to exchange rate fluctuations between the yuan and US dollar, Chen Xianbin's company lost more than 150 million yuan in the past three years from international trade.

Chen's company, Guangxi Sanhuan Enterprise Group, is one of China's leading ceramic tableware exporters and its business with partners from ASEAN accounts for about 15 percent of its total sales.

"We will be happy to use the yuan to do business with our partners. But most of our partners are unwilling to pay us in yuan, as they will have to exchange their own currency into US dollar first. Since the yuan is not traded freely internationally, using the yuan only creates more trouble," Chen said.

Although it seems the currency pilot program may not show significant impact on China's exports, it is being viewed as an important first step in internationalizing the yuan. Revenues from international trade in 2008 reached 10 billion yuan in Guangxi, with 80 percent coming from deals with ASEAN partners, said Zhao Deming, an official in charge of finance in the provincial government.

"The currency program will help strengthen the yuan's reputation," Zhao said.

(China Daily February 19, 2009)