MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) said using the Chinese yuan or renminbi (CNY) as trade currency between the Philippines and China will likely cut peso-US dollar trades which will lead to less market activity and exchange rate volatility.

The BSP has been reviewing the use of CNY as settlement for trades and the most immediate impact seem to be that it will reduce the volume of peso-US dollar trades. “(This) may result to less market activity and therefore, lower peso-US dollar exchange rate volatility,” according to BSP Assistant Governor Ramona Santiago in a memo submitted to the Monetary Board.

Banks and foreign exchange traders consulted by the BSP have confirmed that the liquidity of the CNY in the domestic market is ‘very thin’ compared to the US dollar and other major currencies. If there were large CNY settlements it was being done in the black market.

The BSP is still studying the impact of settling trades between the Philippines and China in CNY, such as in the volatility factor and the possible reduction in the peso-US dollar liquidity. The exchange rate has a range level of P6.4 to P6.6 versus CNY1.

Since 2006, the CNY is a currency convertible with the BSP, thus it is an acceptable currency for export receipts. “Trade settlement via CNY is already practiced,” said Santiago. These transactions are still too small to take note of, in fact there was only one reported transaction in 2009 and no renminbi-denominated trades at all last year.

At the moment the Philippines is still a net exporter to China which would have resulted to net foreign exchange inflows and these inflows, said Santiago, may have contributed to the strength of the peso since 2006 until the end of 2010. Trades between the Philippines and China are still small, averaging only 5.4 percent of the trading volume in the Philippine Dealing System in the last five years.

As of November, total trades with China amounted to $9.23 billion, higher than year ago’s $6.74 billion. Trade in 2008 totaled $9.71 billion, slightly lower compared to 2007’s $9.75 billion. Compared to the Philippines’ sum of export and import of goods, trade with China in the first 11 months of 2010 was equivalent to 9.5 percent of the entire total.

Early last year, BSP Governor Amando M. Tetangco Jr. made the announcement that the banking sector’s renminbi transactions were expected to increase as trade with China and the Philippines continue to expand. In 2009, banks’ CNY transactions amounted to CNY174.6 million from only CNY50,000 in 2008.

Tetangco noted at the time, that renminbi business would grow as more banks realize the business opportunities in dealing in CNY. Between 2009 and 2010, six local banks opened renminbi deposit products. These include Metropolitan Bank and Trust Co., Bank of the Philippines and Philippine National Bank.

The central bank maintains a floating exchange rate system which was determined on the basis of supply and demand in the foreign exchange market.

The BSP also implements a market-oriented foreign exchange rate policy. There are 32 foreign currencies in the exchange rate bulletin but 14 of these are non-covertible with the BSP, such as the India rupee, Malaysian ringgit, New Zealand dollar and the Taiwan dollar.