China Allows Trade Settlement in Yuan in Hong Kong
By Nipa Piboontanasawat and Bob Chen

June 29 (Bloomberg) — China approved use of yuan to settle cross-border trade with Hong Kong, part of a drive to broaden the use of the currency and reduce reliance on the U.S. dollar.

Hong Kong Monetary Authority Chief Executive Joseph Yam said he hopes the first transactions will start next month after signing an agreement with People’s Bank of China Governor Zhou Xiaochuan at the city’s airport today. Zhou said the program would reduce foreign-exchange risks and transaction costs.

China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern that a weakening dollar will cause losses on holdings of U.S. assets. The greenback slumped on June 26 in New York after the People’s Bank of China renewed its call for a new global reserve currency to replace the greenback.

“It’s an important step to make the yuan an international currency,” said Fang Ming, an analyst in Beijing at Bank of China Ltd., the nation’s biggest foreign currency trader. “In the long-term, the world reserve currency system will consist of several major currencies, including the yuan and the euro, instead of just the U.S. dollar.”

The Dollar Index that measures the currency’s performance against six trading partners rose 0.4 percent today, after dropping 0.7 percent on June 26. Zhou told reporters in Basel yesterday that the nation won’t alter the composition of its $1.95 trillion in foreign-currency reserves suddenly. U.S. President Barack Obama needs the support of China as his government tries to spend its way out of a recession.