Ikea and Nokia Shuns Dollars

Nokia, the world’s largest maker of mobile phones, has used yuan for international trade, the Espoo, Finland-based company said last week in an e-mailed response to questions. Sweden’s Ikea, the biggest home-furnishings retailer, also has used yuan for trade, according to Linda Xu, the public relations manager for its Chinese subsidiary.

International trade transactions settled in yuan more than doubled to a record in the third quarter as companies including Nokia Oyj and Metro AG turned to a currency that rose 24 percent against the dollar in six years.

The value of settlements jumped 160 percent from the prior three months to 126.5 billion yuan ($19 billion), the People’s Bank of China reported late yesterday. The amount exceeded all but one of seven forecasts in a Bloomberg survey of analysts. Metro, Germany’s biggest retailer, says paying Chinese suppliers in yuan benefits both parties.

“Doing business with China is much easier now,” said Thomas Burkhalter, finance director of Metro’s Hong Kong-based purchasing unit. “In the past, we have faced problems when there was a sudden movement in the U.S. dollar, which led suppliers to demand additional costs to cover exchange losses.”

While yuan settlements accounted for 2.4 percent of China’s $794 billion of imports and exports during the last quarter, the pace of growth was more than 10 times faster than the expansion in overall trade. The dollar has weakened against all 16 major currencies tracked by Bloomberg since June, when China scrapped a two-year currency peg and said it would allow a more flexible exchange rate.

The Hong Kong Monetary Authority tapped a yuan swap arrangement last week with China’s central bank after demand for the currency exceeded expectations. The proportion of China’s international trade settled in yuan could reach 20 percent in five years, according to Mark McCombe, the chief executive officer for Hong Kong at HSBC Holdings Plc.

“If you consider that China is the biggest exporting country in the world now, with the fastest-growing economy, you can definitely see yuan trade settlement taking at least its fair share,” McCombe said yesterday in an interview.

Premier Wen Jiabao is encouraging greater use of the Chinese currency for international trade and investment to reduce reliance on dollars as the Federal Reserve prints money to support the U.S. economy. The central bank bought $1.7 trillion of debt from December 2008 through March to help end a recession in the U.S. and economists surveyed by Bloomberg predict at least another $500 billion of so-called quantitative easing will be announced when a policy meeting concludes today.

U.S. Pressure

The yuan’s advance in the past six years makes it the eighth best of 25 emerging-market currencies tracked by Bloomberg. The Brazilian real jumped 67 percent in that period, India’s rupee gained 2.4 percent and the Russian ruble weakened 6.4 percent. U.S. President Barack Obama is under pressure to seek faster appreciation in the yuan after the American trade deficit with China reached a record $28 billion in August.

China’s currency has strengthened 2.3 percent to 6.6749 per dollar, including a 0.4 percent advance yesterday, since June 19, when the central bank said it would pursue a more flexible exchange rate after keeping the currency at about 6.83 for almost two years.

Hong Kong

In Hong Kong’s offshore market, where multinationals repatriating yuan from China can sell the currency, the exchange rate was 6.5995 per dollar as of 3:15 p.m. local time, a 1.1 percent premium to the spot rate in Shanghai. Non-deliverable forwards reflect bets the currency will strengthen 3.6 percent from the onshore rate in the coming 12 months.

“The general market view is the yuan will appreciate in the near term,” said Neil Daswani, regional head of transaction banking for Northeast Asia at Standard Chartered Plc. “It’s very advantageous for multinational companies to receive proceeds in yuan.”

Confidence in China’s dollar debt is improving. Five-year credit-default swap contracts on China’s U.S. dollar bonds fell one basis point in the last two days to 59 points in New York, CMA prices show. That followed a seven basis point slide in October and 19 basis point drop in September. Credit-default swaps typically decline as investor confidence improves and rise as it deteriorates.

Yields Rise

Yields on China’s 3.28 percent bond due August 2020 rose eight basis points to 3.80 percent, according to National Interbank Funding Center. The rate jumped as much as 37 basis points, or 0.37 percentage point, last month as the central bank raised interest rates for the first time since 2007 to tame the fastest inflation in two years.

The extra yield investors demand to hold China’s 10-year bonds rather than similar-maturity U.S. government debt grew to 113 basis points, according to data compiled by Bloomberg.

The Hong Kong Monetary Authority plans to draw 10 billion yuan through its swap arrangement in the currency with the People’s Bank, Deputy Chief Executive Officer Arthur Yuen said Oct. 28. The two central banks agreed on a 200 billion yuan facility in January 2009 to help ease yuan shortages and bolster Hong Kong’s role as a foreign-exchange hub.

‘Swap Line’

China signed a three-year 150 billion yuan currency swap in July with the Monetary Authority of Singapore. Transactions with Hong Kong and Singapore accounted for 87 percent of all yuan settlement business, the People’s Bank said on Aug. 5.

“In terms of total demand for yuan in Hong Kong, the 10 billion yuan is nothing but a drop in the ocean,” said Isaac Meng, a senior economist at BNP Paribas SA in Beijing. “If the settlement continues to expand rapidly, it’s possible Singapore may be the next central bank to tap a swap line with China.”

More than half of Hong Kong-based exporters and importers plan to use yuan for trade settlement in the next six months, reflecting the currency’s widening acceptance, HSBC said in September, citing a global survey. In Malaysia, 49 percent of companies predicted they would use yuan for some transactions and in Singapore the proportion was 17 percent.

China first approved yuan use for trade settlement in July 2009 and Zheng Yang, an official at the People’s Bank of China’s Shanghai branch, on Sept. 27 said the value of such transactions may reach 200 billion yuan by the end of this year. The total for the first nine months was 197.1 billion yuan, yesterday’s central bank data showed.

The table below shows analysts’ projections for the value of international trade settled in yuan during the third quarter.

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