China's Yuan Trade Expands Offshore

TAIPEI (TheStreet) -- This month China again expanded offshore trading of the tightly controlled but highly coveted yuan currency. The latest target, Taiwan.

Officials in Beijing had already done the same for Hong Kong. As a result, the Asian financial hub handled trade worth 1.915 trillion yuan ($307 billion) of a total 2.081 trillion yuan in transactions made outside the mainland in 2011.

Taiwan has a ways to go before reaching Hong Kong levels, though Asian currency analysts say it has the right hardware in place. Yet, I'm about to bet some forex here that for most of the world it's not that big of a deal.

The island that once flirted with the idea of war with China won the currency settlement deal because five years ago it dropped its tough stance that had killed prospects of any deal with the huge, ever-harder-to-ignore Chinese economy.

China still claims self-ruled Taiwan as part of its turf, but the two sides have quit mentioning it. Beijing hopes the currency agreement, among others that help Taiwan's economy, will make formal unification attractive to a largely leery public.

But it was already too late to stand out. Taiwan will vie for offshore investors with Malaysia, where 11 financial institutions have signed up to allow trade settlements and electronic yuan fund transfers. Then comes the famously liquid financial center Singapore. The city-state in Southeast Asia said last year China was planning to pick a local bank to clear yuan settlements. Even London is working on a yuan scheme.

Not all that many years ago, the yuan was all but non-negotiable outside mainland China. You had to get yuan in the country. One you had it there, you spent it there.

Beijing's goal is to reward other regions for being friends of China or to inspire more support. As in Taiwan, people in Hong Kong remain squeamish about allying too closely with Beijing despite its huge economy and common ethnic heritage.

The world's second-largest economy is also promoting offshore settlement centers to extend the use of renminbi in global trade. What better for nationalism than to have other currencies converted to yuan instead of U.S. dollars on millions of documents?

For those outside China, offshore interbank trade in the Chinese currency means easier, cheaper access for multinational corporations that do business in China. That's just about everyone.

Foreign investors can settle accounts with suppliers or partners in Chinese currency without costly foreign exchange conversions. Yuan received can later be re-used, exchanged for other currencies or kept in an offshore deposit.

Says Tim Condon, Asia head of research with ING in Singapore: "Wherever there's significant trade with China, there are companies who prefer to invoice those trades in yuan to avoid the exchange rate risk."

Multinational corporations already tend to work out of Hong Kong, making them obvious clients for renminbi business in that city and explaining part of the large trade volume. Hong Kong is not just a who's who of Asia-Pacific headquarters for global companies. It's also a clean, fair city for doing business.

Expect a payback for the likes of HSBC ( HBC), which does commercial renminbi services for more than 160,000 small and medium enterprises in Hong Kong.

Singapore's advantages largely match Hong Kong's, especially for those keen on business in Southeast Asia. I'm less sure about Malaysia. Except for multinational corporations (MNCs) bound closely to local commodities such as palm oil, most wouldn't pick that country just as a center for mass cross-border banking.

Taiwan has been out to prove that its quickly improved ties with Beijing after 60 years of tension can turn the island into a gateway for Western firms that do some business in China but don't want to plunge headlong into it. So Taiwan was keen to sign a deal with China in August to establish the yuan exchange that began Feb. 6.

But I expect Taiwan to rank down with Malaysia in the eyes of MNCs. Foreign renminbi spenders already know how to operate in the free port cities of Hong Kong and Singapore, where foreigners generally have an easy time with just about anything.

Despite Taiwan's urge to bring in more Western MNC business, the island's finance and business rules can be as protectionist as China's.

Almost every year the American or European (or both) chamber of commerce in Taiwan puts out a white paper complaining of uneven playing fields. Earlier in the month I asked a group of Taiwan-based foreigners with occasional business in China what they thought about the yuan deal. They shrugged. They already had the conversion thing worked out some other way.

There's the odd exception such as Volkswagen ( VLKAY). Taiwan's semi-official news service said this month the German automaker would open a plant in Taiwan by 2015 to assemble 50,000 cars per year. VW already makes cars in China and is expected to have sold 2.81 million units in the same market, so it's easy to imagine a few currency exchanges between there and Taiwan.

American IT giants such as Microsoft ( MSFT), which has R&D centers in both China and Taiwan with plans to add 1,500 employees in China, also stand to save time and expense on yuan settlements.

But for the most part, The Taiwan-China currency deal helps Taiwanese businesses. Major firms such as Taiwan Semiconductor ( TSM) and Hon Hai ( HNHPF) -- the ones with China factories -- will be able to do transactions in renminbi on either side of the Taiwan strait.

It's obvious why. A total of 46 foreign exchange institutions in Taiwan opened yuan business this month after signing currency clearing agreements with the Bank of China's Taipei branch. Taiwanese can now open yuan accounts at those banks, with more renminbi products on the way, news reports from China say.

I still don't see too many foreign business people lining up in Taipei for banknotes bearing Mao Zedong.

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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