Larger role in trade moves yuan toward reserve status
If China was once jogging along the path toward internationalizing its currency, it is now running to challenge the US dollar as a global reserve currency.
It seems that the People’s Bank of China (PBOC), the country’s central bank, has never in its history signed as many currency agreements with foreign peers as it has since June.
The PBOC designated China Construction Bank as the clearing bank for London during Chinese Premier Li Keqiang’s visit to the UK on June 18. One day later, it appointed Bank of China to provide renminbi clearing service for Frankfurt.
On June 29, the PBOC said it signed yuan clearing service arrangements with Paris and Luxembourg, symbolizing full currency transaction coverage on the European continent.
Days later, the PBOC announced the establishment of yuan clearing services in Seoul, South Korea, and appointed Bank of Communications as the clearing bank. This came, of course, during Chinese President Xi Jinping’s visit to the country.
Xi’s trip also led to direct trading between the yuan and the South Korean won, the sixth foreign currency to open a direct link with the yuan after the British pound, the Australian and New Zealand dollars, the Japanese yen and the US dollar.
Singapore and Sydney are also vying for shares of the global yuan market, along with China’s fast-growing economy.
The overseas enthusiasm for yuan trading is a reflection of Chinese efforts to internationalize the yuan as well as geopolitical developments and market pressures.
Russian companies are turning to the yuan and other Asian currencies amid fears that Western sanctions may freeze them out of the US dollar market, the Financial Times reported on June 8, citing bank executives.
Recent US fine of nearly $9 billion on BNP Paribas, along with a yearlong ban on conducting certain US dollar transactions, may prompt the French institution to shift away from the dollar to use euros and the yuan to finance trade between China and Europe, Christian Noyer, governor of the Bank of France, told the media in June.
China overtook the US to become the world’s largest trading nation in 2013. Its huge trading volume is a powerful force which can be used to demand trade settlement in its own currency.
It is in the interest of Chinese companies nowadays to demand payment in the yuan for imports as well as for exports, as they now have greater exposure to foreign exchange risk than ever before.
The Chinese government doubled the daily trading band of the yuan against the US dollar to 2 percent in March, and Friday further widened the trading band of the yuan against other major currencies, including the euro and the yen. This means greater volatility and losses if the foreign trading currencies head in an unfavorable direction.
Under such circumstances, foreign banks are even more eager than their Chinese peers to follow their rich Chinese clients as they go global, further accelerating the internationalization of the yuan.
In October 2013, the yuan overtook the euro as the second mostly used currency in international trade financing, according to data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
In the US, renminbi payment value increased by 327 percent for the year through April, making the US the third in the world in terms of yuan payment value, outside China, the SWIFT said in June.
The Chinese yuan advanced from No.35 in October 2010 to become the seventh mostly used global payment currency in April, despite its share of just 1.43 percent of global payments, according to the SWIFT.
Cross-border yuan transactions totaled 4.6 trillion yuan ($741.4 billion) in 2013, up 57 percent year-on-year, according to China’s central bank.
These data show China moving further down the path toward yuan internationalization, which will be marked first by use of the yuan for trade financing, then for investment and then in the longer term as a reserve currency.
Establishing the yuan as a global reserve currency will make it easier to manage the country’s ballooning foreign currency reserves, which hit nearly $4 trillion at the end of March. Most of the reserves are in US dollars and invested in low-yield US government and corporate bonds.
To make the yuan eventually a global reserve currency, the Chinese government will have to further open up and lift controls on its capital account, which will also be a good thing for foreign investors looking to share the gains of China’s fast economic growth.
Amid efforts to bolster the yuan’s profile, the liberalization of China’s capital account should be done cautiously and gradually, as a sudden freeing could result in uncontrollable capital outflows which may endanger the country’s overall financial system.
Currency deals enhance global profile of RMB