Liquidity levels in the capital markets will improve and foreign exchange borrowing costs will reduce as more companies start settling cross-border trade with yuan, said analysts.

"There is a growing number of Chinese companies requiring their overseas business partners to use yuan in trade," said Ling Jiamin, a manager at Hong Kong-based Citigroup Inc.

HSBC Holdings Plc and Standard Chartered Plc have started yuan-settlement services such as channeling the yuan from abroad into the Chinese capital markets. To encourage usage, these banks offer incentives such as discount in transaction fees.

Citigroup Inc and JPMorgan Chase & Co are promoting this service in Asia, Europe and the United States.

According to a report by the People's Bank of China (PBOC), cross-border yuan settlement services increased 18 times in the first half of this year, totaling 67.08 billion yuan (US$9.84 billion), when compared to the same period last year.

In June, the PBOC increased its pilot programs to other regions in the country for cross-border settlement using yuan. At present, Chinese exporters and importers in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan are already allowed to settle cross-border trade deals in yuan.

The scope of pilot services was also expanded to include service trades and current account.

As part of its effort to promote the usage of yuan in international trade, the PBOC said on Aug 17 that it would widen overseas access to the yuan by allowing foreign financial institutions to invest in the Chinese bond market.

"Allowing foreign institutions to inject funds into the bond market will increase interest rates of yuan deposits abroad, which encourages companies to hold yuan and use the currency to settle trade, said an economist from PBOC, who requested anonymity.

"There will be more alternative financial instruments for overseas institutions to invest in the country after PBOC's announcement. Pilot program such as the 'mini-QFII' (qualified foreign institutional investors) that may be launched soon, will help shore up yuan's liquidity," said Shen Hanliang, director at the Cash Management and Trade Department of Standard Chartered.

In order to seize more market share in cross-border settlement using yuan, Citigroup adjusted its internal risk management system, created new financial products and redesigned its marketing strategies, said Pei Yigen, a manager from Citigroup.

A manager from HSBC said the multinational bank will provide more financial instruments including yuan settlement accounts, documentary credits and corporate bonds.

(China Daily September 7, 2010)