By Cong Mu

The volume of cross-border business transactions settled in the Chinese yuan has started to increase significantly, but experts fear the rising trend is unsustainable due to the de facto pegging of the currency to the US dollar.

The aggregate yuan settlement amount in Shanghai alone was estimated to have surpassed 300 million yuan ($43.9 million) as of November, China Business News (CBN) reported Wednesday. As of November 20, the Shanghai branch of Bank of China had handled 120 million yuan ($17.6 million) in the settlement, according to the bank.

An unnamed person in charge of international business in a Chinese bank in Shanghai told CBN that the increase was due to the completion of related regulations on such issues as customs claims and tax rebates, but the acceptance of the yuan by overseas companies remains a problem.

Tan Yaling, a Beijing-based foreign exchange expert, told the Global Times that firms in Southeast Asia are willing to accept the yuan because they expect it to appreciate. If the yuan starts to decline, the settlement volume is at risk of going down.

Bank of America Merrill Lynch said in a research report Tuesday that they expect the yuan to appreciate gradually next year and the short-term inflation risks and a longer-term orientation toward the consumer argue for ending the artificial weakening of the currency.

Calyon, the investment bank arm of Credit Agricole, a major French bank, forecast the dollar-to-yuan exchange rate would rise to 6.50 by 2010 and 6.20 by 2011.

The People's Bank of China set the dollar-to-yuan central parity at 6.8279 Wednesday.

The Chinese mainland began testing cross-border settlement in the yuan with Hong Kong and Southeast Asian countries first in Shanghai on July 6, followed immediately by four other cities in South China's Guangdong Province, involving 365 companies in the five cities.

However, ever since they made the first settlements on July 8, many of the companies stopped settling accounts in the yuan, China News Service reported in August. One of the reasons was that there was no measure to give tax rebates to the exporters which adopted the currency.

Tan said that the current foreign exchange regime does not effectively support the broadening of the settlement.

She said that the internationalization of the currency should rely on the country's economic fundamentals and the yuan targeting a basket of foreign currencies.

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