(Yicai Global) April 14 -- As an increasing number of international companies choose to use the Chinese yuan in cross-border payments, the expanded use of the yuan still faces some challenges. The internationalization of the redback needs not only more countries to increase their yuan reserves, but the process also needs to become more streamlined and safe, experts said.”

China has established yuan settlement arrangements with an increasing number of countries and the trend of giving priority to yuan payments in cross-border e-commerce is becoming more noticeable. Buyers from countries with smaller dollar reserves, and also customers in Malaysia, Vietnam, India and Japan tend to be more willing to settle in the redback.

“Yuan payments in cross-border e-commerce are becoming more popular because they are faster than traditional forms of settlement,” said Wei Jianguo, vice chairman of the China Center for International Economic Exchanges and former vice minister of the Ministry of Commerce.

“In the past, it took three months from the dispatch of goods to payment with foreign exchange, during which time the exchange rate changed too much,” Wei Jianguo said, adding that a large number of small and medium-sized enterprises are engaged in cross-border e-retail and they need support in hedging exchange rate risks.

“Recently, more and more foreign customers are asking whether they can settle in yuan,” Wei Guowen, general manager of trading firm Ningbo Paulinda I/E, told Yicai Global. But most of them will first calculate which is more cost-effective, paying in yuan or US dollars. If they decide to proceed with the yuan then they will consider whether all the extra effort is worth it, as they will have to open a new yuan account, which can be troublesome.

Around 5 percent of Wei’s export business, amounting to around four or five clients, is settled in yuan.

E-commerce giant Alibaba Group Holding’s business-to-business cross-border e-retail platform Alibaba International launched a “Credit Guaranteed Chinese Yuan Transaction Order” function in July 2019 to help protect small and medium-sized foreign traders from exchange rate fluctuations and to also assist them to extend their business to areas which do not use the greenback.

Since 2019, Beijing Diamond Sports International Trading has conducted over CNY140 million (USD20.4 million) worth of transactions in yuan on Alibaba International, General Manager Zhao Xiadi said.

Bigger Reserves

To promote wider use of the redback, countries need larger yuan reserves, yet the yuan’s share of foreign exchange reserves is still small, Wei Jianguo said. The US dollar accounted for 58.3 percent of global forex reserves in the fourth quarter last year, while the yuan made up only 2.6 percent, ranking fifth in the world, according to International Monetary Fund data.

On the one hand, foreign trade firms need to understand the nature of making yuan payments and the needs of the counterparty and on the other hand, banks and third-party cross-border payment institutions have to ensure safety by screening for money laundering and other crimes, said Niu Naqing, foreign exchange expert at cross-border trade digital service provider PingPong Research Institute.

The internationalization of the yuan requires the all-around improvement of payment, investment, financing and reserve systems, said Ming Ming, chief economist of CITIC Securities.

It is necessary not only to gradually increase the use of the yuan in the clearing and settlement of international trade and investment, but also to strengthen the macro-prudential management and supervision of cross-border capital flows, as well as to promote the convertibility of the yuan held in bank accounts, Ming said.

In addition, China should do more to develop overseas financial markets, including improving the offshore market in Hong Kong and upgrading the Hainan Free Trade Port's financial capabilities, he added.

Editor: Kim Taylor