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China for the first time allowed the yuan to trade against the Malaysian ringgit on the domestic market last Thursday in a move signalling China’s intention to progressively turn the yuan into a major global currency, according to a Wall Street Journal online report.

Beijing has been promoting the use of yuan to settle commercial trade transactions and expanding the scope of yuan business in Hong Kong in recent years to internationalize the Chinese currency. It has also launched a trial program that allows overseas investors to put yuan held offshore into China’s interbank bond market.

China’s move to open up yuan-ringgit trading in the onshore interbank foreign exchange market came after Malaysia’s central bank Wednesday removed some of the limitations on trading of ringgit by foreigners, imposed in the aftermath of the 1997 Asian financial crisis. The ringgit soared to a near 13-year high against the dollar Thursday, propelled by the news.

The People’s Bank of China set the yuan-ringgit central parity, a reference exchange rate used to guide the pair’s daily movements, at 0.46204 Thursday.

In a statement Wednesday, the China Foreign Exchange Trading Center, the central bank’s domestic currency trading platform, said it would kick off yuan/ringgit trading Thursday to boost bilateral trade and facilitate the use of yuan for cross-border trade settlements.

In each daily session, the yuan/ringgit pair will be allowed to move as much as 5% above or below the central parity rate, the statement said. This makes the yuan/ringgit trading band much wider than the 0.5% for the U.S. dollar-yuan pair and 3% for the other four non-dollar currencies —the euro, yen, Hong Kong dollar, and the pound, according to the report.

Trading interest in the yuan/ringgit pair was scarce last Thursday morning, reflecting the relatively modest size of bilateral trade between China and Malaysia and a lack of price data available to investors, traders said.

The yuan was quoted around 0.4607-0.4613 ringgit in early trading, slightly lower than the 0.46204 ringgit central parity rate, according to a Shanghai-based trader at a European bank.

“There are few deals today and to be honest, I don’t think there will be huge demand for it since the ringgit is a restricted currency too,” the trader said.

While the small size of the yuan-ringgit market makes Beijing’s efforts more symbolic in nature at this stage, it marks a step forward for the authorities in broadening the use of the Chinese currency.

“It will be very positive for cross-border flows, as it will facilitate trade” between China and Malaysia, said Wai Ho Leong, an economist at Barclays Capital.

As part of China’s push to internationalize the yuan by increasing its circulation overseas, China and Malaysia signed a currency-swap agreement in February 2009, which when fully set up will increase the availability of yuan in Malaysia and ringgit in China.

“You can treat today’s move as a step toward yuan internationalization and I heard more Asian currencies are their way here too,” said the European bank trader, referring to the possibility of Beijing allowing more regional currencies to be traded onshore.

Traders have long expected the currencies of other Asian countries that have close trade ties with China, such as the Singapore dollar, Indonesian rupiah and the South Korean won, to join the fold one by one in the next few years.

Experimenting with such regional currencies in a carefully managed fashion is typical of Beijing’s dual task of gradually liberalizing its currency regime and avoiding rapid reforms that could disrupt its hard-earned domestic financial stability.

Malaysia, which hitched the ringgit to the dollar in September 1998 to shield its economy during the Asian crisis, removed the peg in July 2005, allowing the ringgit to move in a managed float against several major currencies.

The Malaysian central bank said late Wednesday it has further relaxed foreign exchange administration rules to enhance the country’s competitiveness.

They include allowing the use of the ringgit as a currency of settlement for international trade between residents and non residents, allowing resident companies to obtain any amount of foreign currency loans from non-resident non-bank related companies and abolishing the limit on anticipatory hedging of current account transactions by residents with licensed onshore banks. Prior to the announcement, the limit was 12 months.


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