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On April 8, 2009, the State Council of China identified five key manufacturing cities in China to use RenMinBi (RMB), on a trial basis, in cross board trade transactions with certain Asian countries. The trial cities are Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai. For FIEs in those five cities that export to Asian countries, the new policy may allow them to use RMB, instead of the U.S. Dollar, as the settlement currency for any trade transaction to avoid exchange rate fluctuations, save at least 2-3 percent in transactional cost and optimize tax allocations. Foreign companies in other Asian countries that trade with China should keep abreast of this new policy's developments and prepare to negotiate with Chinese business partners with respect to the issue of RMB payment.
This announcement brings China one step closer to using the RMB as the settlement currency of choice for current account transactions and represents a major step in the process of having a fully convertible currency. Beijing has yet to announce details or implementation rules of the policy. We will send out updates as additional details are announced.