China for the first time allowed domestic trading of the yuan against the Malaysian ringgit Thursday and said it would broaden the range of currencies permitted to trade onshore, as it steadily moves to turn the yuan into a major currency and boost its use in cross-border trade.
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. Earlier this week, it 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.
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.
"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.
CFETS said China will consider allowing more currencies to trade against the yuan onshore, depending on future developments in bilateral trade, financial cooperation and the convertibility of currencies.
It also said it may consider launching trade of yuan/ringgit forwards and foreign exchange swaps in the future depending on market demand.
