China Conducts First Cross Border Yuan Settlements

And so it begins...

UPDATE: China Conducts First Cross-Border Yuan Transactions
By Denis McMahon, Dow Jones Newswires; 8621 6120-1200; denis.mcmahon@dowjones.com

SHANGHAI (Dow Jones)--China formally allowed the use of the yuan to settle cross-border trade Monday, and three Shanghai-based firms completed transactions using the currency.

While Hong Kong residents have been allowed to move yuan between their local bank accounts and mainland China on a limited basis for years, this is the first time Beijing has extended yuan settlement to include commercial transactions.

It is also an important first step toward promoting the yuan as a regional currency and reducing China's dependence on the U.S. dollar.

Of the transactions completed Monday, Bank of China Ltd. (3988.HK) settled a deal by a unit of Shanghai Electric Group, a manufacturer of mechanical and electrical equipment.

Bank of Communications Ltd. (3328.HK) settled trades by Shanghai Silk Group Co., a textiles exporter, and that of a Shanghai-based trading house whose English name wasn't immediately available.

Bank of Communications also said over the weekend it set up a yuan-denominated letter of credit for a China-based unit of conglomerate Salim Group, on the order of PT Indotruck Utama, an Indonesian firm.

With dollar-denominated trade financing having dried up globally with the financial crisis, yuan settlement will allow China's highly liquid banking sector to offer finance in yuan and help keep the country's export sector humming.

Although Beijing first signaled its intention to allow the use of the yuan for cross-border settlement in December, guidelines governing how it should work on a trial basis were only issued last week.

According to the statement from Bank of Communications over the weekend, currently only 100 firms in Shanghai, 100 from Shenzhen, and a combined 200 from Guangzhou, Dongguan, and Zhuhai can settle cross-border trade in yuan.

"We want to strictly keep this limited to trade-based transactions," said People's Bank of China Vice Gov. Su Ning on the sidelines of an event marking the launch of yuan settlement.

"The trial will increase the liquidity of the yuan outside of China, but by keeping it limited to only a handful of cities in this starting stage, we can control the volume," Su added.

He also said the program will help promote the stability of China's exports, and that a stable currency will help to expand the country's external trade.

China's central bank has been keeping the yuan stable against the U.S. dollar for almost a year.