Reuters/Hong Kong
China’s efforts to raise the global status of its currency are paying dividends, with the yuan breaking into the top five world payment currencies for the first time and offshore trading volumes catching up with those onshore.
After nearly a year firmly positioned at the seventh spot, the yuan finally surpassed the Canadian dollar and the Australian dollar in November in terms of value, according to global transaction service organisation SWIFT.
The yuan has been showing consistent three-digit growth over the past two years with an increase in value of payments of 321%, SWIFT said. It is only behind the US dollar, euro, British pound and Japanese yen.
“Daily trading volume in CNH spot, forward and swap markets have already reached $30bn, among which $10bn is from spot yuan trading,” said Charles Feng, Greater China head of FX, rates and credit trading at Standard Chartered in Hong Kong.
The momentum is expected to continue this year, with daily turnover seen increasing by 20-30%, thanks to the quick expansion of cross-border trade settlement denominated in the yuan, Feng said.
Yuan trade settlement has made great strides since a landmark pilot scheme in 2009 allowed selected cities in China to settle trade transactions in yuan with some foreign countries. It now accounts for more than 20% of China’s total trade, compared with less than 2% in 2010.
Ben Hung, chief executive officer for Standard Chartered’s Greater China region, expected the yuan’s share in trade settlement to reach 35% of the total trade in the world’s second-largest economy by 2020.
As the offshore yuan liquidity pool continues to expand and the Chinese currency becomes more available to foreign investors, officials in Asian and other G20 capitals believe there will be lively debate at an IMF review later this year to decide whether it should be added to Special Drawing Rights (SDR).
The chief argument against its inclusion five years ago in the SDR, a basket of yen, dollars, pounds and euro used as the International Monetary Fund’s (IMF) in-house unit of account, was that it was far from freely “usable” or convertible.
However, the situation has been greatly changed since the deliverable yuan market came into being in 2010. Yuan deposits and certificate of deposits in Hong Kong, the world’s largest offshore yuan center, have already exceeded 1.1tn yuan ($176.20bn).
In addition to the former British colony, China has assigned yuan clearing banks to 13 countries or regions, and signed currency swaps with 28 countries worth more than 3tn yuan to facilitate trade and transactions settled in the yuan.
While the offshore yuan pool is growing, Beijing has also accelerated steps to allow broader foreign participation in its domestic capital markets by expanding the popular Renminbi Qualified Foreign Institutional Investor (RQFII) and launching a landmark stock connect between Shanghai and Hong Kong. If the IMF accepts the yuan as part of its currency basket, it would pave the way for the “redback” to become a global reserve currency and reinforce investors’ confidence in the currency. So far, more than 50 foreign central banks have started to use the yuan or keep it as part of their foreign reserves.
