(Caijing Magazine) After months of uncertainty, a pilot program for yuan-based trade settlement took a substantial step forward when the People's Bank of China, the central bank, recently released new rules for cross-border transactions.

That same day – July 2 -- Shanghai officials said they were ready to launch the first transaction for a program approved by the State Council, China's cabinet, almost three months earlier.

The Standing Committee of the State Council decided April 8 that five cities would be allowed to launch yuan settlement for cross-border trade. But according to a central bank source, that committee meeting ended without an agreement on implementation measures, leaving work on complex details to government agencies and banks. And Shanghai's program launch stumbled and had to be suddenly canceled for "technical reasons."

Indeed, more work will be needed before the yuan is elevated to international currency level. Questions about exchange procedures, tax rebates and the yuan's appreciation are still shadowing the process.

Monetary Complexities

The day after the State Council ruling in April, the central bank brought together officials from various government agencies to discuss provisions in the draft rules. Beijing's goal was to release a full set of administrative rules in May.

But sorting out the details was far more complicated than originally thought. This complexity has been blamed for a long pre-launch period. Now, according to the central bank source, amending the rule is being handled as a systematic project.

Yuan settlement touches all kinds of issues. Systematic supervision and review procedures are for transactions, which involve opening new accounts, receipts, account balance management and customs supervision. Other top issues involve arranging yuan settlements inside and outside China, bank transactions, tax rebates for foreign trade.

Government agencies are keenly interested in tax rebating. A source told Caijing that, with the pilot's launch, certain import and export transactions would no longer need foreign exchange receipts and verifications, both used to be under the supervision of state administration of foreign exchange. This development will increase supervisory risks among taxation administrations. The settlement rule calls for tracking export data to help determine export tax rebates.

Wang Yongli, a deputy governor at the Bank of China, said in an interview with Caijing that export tax rebate issues can be resolved through use of an accounting currency. Two currency symbols would be adopted: one for yuan circulated within China; the other for yuan used in cross-border trade settlements. Customs officials can better track each kind of deal and decide whether to issue tax rebates.

A source at the State Administration of Taxation told Caijing his agency had studied export tax rebate and yuan settlement issues. As part of the study, opinions were solicited from other government bodies. New policy is expected in the near future.