* UK importers' experience jars with yuan's emergence
* IMF has admitted yuan to its benchmark currency basket
* But Chinese factories often prefer payment in dollars
* Exporters need dollars to repay U.S. currency debt
* Yuan still worth just 2 pct of international payments
By Patrick Graham
BASILDON, England, Jan 6 (Reuters) - British businessmanTony Brown is ready to pay in Chinese yuan for the cuddly toysand other funfair stall prizes he buys from a handful of Chinesefactories. But they just don't want it.
He thought using the local currency for the purchases, worthseveral million pounds every month, would be a selling pointwith his Asian partners, a sign of good faith and presumablyeasier to do.
They would rather have dollars.
This is a familiar experience for hundreds of small andmedium-sized British companies which deal with Chinese factoriesand firms. It also jars with the big headlines over the pastyear proclaiming the emergence of the yuan as a major currency,and London as its main international trading hub.
"We have tried but there is no appetite," says Brown, whohas 19 years of experience in working closely with Chinesesuppliers.
Flows among some of the major banks and speculativefinancial investors have surged, and the yuan is an increasinglyheavily used trading currency in Asia. But its visibility in theday-to-day economy in the West is next to nil.
Some of the thousands of British managers who regularly dealwith China say this is due to the difficulty of changingestablished practices, the Chinese firms' need for dollars topay off debt and other international dues and a lack of faith inthe current value of the yuan, now in the throes of its secondmajor devaluation since last August.
"Historically they desperately wanted dollars and it has just continued. We've had discussions about paying in localcurrency. But they just have limited exposure in yuan so theywould rather have dollars," said Brown.
If you've played fairground or funfair stall games over thepast few years in Britain, the chances are your prize has beenimported by his company, Whitehouse Leisure, based in the townof Basildon just outside London.
The biggest seller in the past year has been fluffy Miniontoys, made famous by the kids' movie "Despicable Me" anddistributed to points ranging from the Legoland theme park tosmall mobile funfairs that set up around Britain.
It's good business and Whitehouse Leisure is a leadingclient of AFEX, among the biggest in a group of London-basedcurrency brokers specialising in dealing for companies whoseneeds aren't quite large enough to get the premium rates andservices that banks offer top corporates.
AFEX sales director James Collins says that of the 150corporate clients on his books, none is doing any major businessin yuan due to Chinese reluctance. "We've offered it, and lotsof people have looked at it, but there has just been no take-upfrom the other side," he says.
SURGE
China has pressed ahead with efforts to internationalise theyuan in the past year, regarding this as a crucial element ofits future place in the global economic and financial hierarchy.
Data from banking network Swift show the yuan, also known asthe renminbi or RMB, is now the fifth most-used currency forinternational payments. The big bank-to-bank trading platformsreport a surge in its usage that often makes it among a handfulof their most traded currencies.
A decade of huge dollar earnings for Chinese companies,however, allied to ultra-low U.S. interest rates since 2008, hasreinforced the greenback's day-to-day usage in investment andtrade.
The International Monetary Fund's admission last year of the yuan into its benchmark currency basket should soon mean theChinese unit makes up closer to 10 percent of global centralbank reserves.
However, even after two years of substantial growth, theyuan is worth just 2 percent of all international paymentscompared with 52 percent for the dollar, and it is used for lessthan 0.5 percent of trade in goods and services.
Chinese companies still hold around $1 trillion ofshort-term debt in U.S. currency and are repaying it, and theinterest, in billions of dollars monthly. Much of that moneycomes in to offshore accounts and never lands in China.
Another AFEX client, Bob Latham, pays around $100,000 everymonth for the reinforced composite and glazing materials he buysfrom Chinese factories to sell on to clients in the West.
"We did offer to pay the factories in RMB. It's in ourinterest to make it as easy as possible for them to sell to us,so that we're the easiest route to market," he says.
"But it all tended to get a little bit crazy. They haveforeign bank accounts and that's where they handle all theirforeign sales. So when we tried to pay in yuan they changed itinto U.S. dollars, and then they transfer it from U.S. dollarsback into RMB. So we couldn't see any logic or benefit."
RATE PLAY
All of that is hard to square with the flood of corporatepromotion of the yuan, chiefly by banks such as HSBC, StandardChartered, Citi and others for whom it is a rare growing marketat a time when trading operations and profits have been slashed.
The Swift numbers point to a disparity between Asia and therest of the world. The yuan is used, for example, for about 7percent of payments between Japan and China, compared with the 2percent global figure.
Still, the yuan offers better returns than dollars,compensating for higher conversion costs due to the wider gapbetween buy and sell rates.
Bankers say trade in the yuan in London has boomed in thepast six months and that bigger corporate clients have beenpaying in the currency for over a year.
"We're doing a lot of it now," says Tobias Davis, who sellshedging and options products to bigger corporates for WesternUnion in London.
"Especially on forwards and options there's a lot of benefitin settling direct in yuan. Interest rates are above 4 percentso while you're holding the position you get that interest ratecarry. That offsets the marginally wider spreads you will get onthe yuan compared to the dollar."
But he also acknowledges Chinese clients remain keen toreceive dollars. "The assumption since last year has been theywill devalue the yuan further. So at least right at the momentthe Chinese corporates don't want to be holding yuan while thathappens - they would much rather have dollars." (editing by David Stamp)
HSBC Holdings (HSBA)
