We pre­fer to look at the long-term trend when it comestoRMB in­ter­na­tion­al­iza­tion.”

China Daily (USA) - - ANALYSIS - For China Daily

In April, London over­took Singa­pore as the largest yuan clear­ing cen­ter out­side China. In Septem­ber, the United States got its first yuan clear­ing bank. A month later, the yuan of­fi­cially be­came a global re­serve cur­rency.

The pace of ex­pan­sion of the yuan has been re­lent­less and be­lies the re­al­ity that, in terms of global mar­ket share, the growth is only just be­gin­ning. The world­wide use of the cur­rency re­mains much smaller than it should be.

“Cur­rently, there is dis­cor­dance be­tween the po­si­tion of the RMB as a pay­ment cur­rency and the weight of China in the global econ­omy,” said Michael Moon, head of pay­ments mar­kets for Asia Pa­cific at SWIFT, the So­ci­ety for World­wide In­ter­bank Fi­nan­cial Telecom­mu­ni­ca­tion, a global trans­ac­tion ser­vices or­ga­ni­za­tion.

“In terms of rank­ing, we pre­fer to look at the longterm trend when it comes to RMB in­ter­na­tion­al­iza­tion. Just three years ago, in Au­gust 2013, the RMB was ranked at po­si­tion No 9 (of the world’s cur­ren­cies most used for pay­ments) with a share of 0.84 per­cent,” Moon said.

“In the last three years, the RMB over­took sev­eral cur­ren­cies in­clud­ing the Swedish krona, Hong Kong dol­lar, Swiss franc and Cana­dian dol­lar.

“There is still a lot of room to grow for the RMB.”

The yuan is now the world’s fifth most-used cur­rency for pay­ments, with a 2.03 per­cent mar­ket share. In early 2014, it was at sev­enth place with a global mar­ket share of 1.39 per­cent.

In Septem­ber, Bank of China was ap­pointed as the first yuan clear­ing bank in the US, one of the last ma­jor economies with­out such a fa­cil­ity. It is be­com­ing in­creas­ingly dif­fi­cult to find a coun­try that does not deal in yuan or from which a busi­ness can­not han­dle pay­ments into China using the cur­rency.

Some 1,247 banks around the world al­ready use the yuan for trans­ac­tions into the Chi­nese main­land and Hong Kong, ac­cord­ing to SWIFT.

A decade ago, Hong Kong was the only off­shore yuan clear­ing hub. To­day, the world has more than 20 and count­ing. Fifty-seven coun­tries now use the yuan to make more than 10 per­cent of their di­rect pay­ments to the Chi­nese main­land or Hong Kong, ac­cord­ing to SWIFT, and 101 coun­tries use the yuan in some fash­ion — that is about half of all the coun­tries in the world.

In more de­vel­oped West­ern Europe, in places such as France, Switzer­land and Ger­many, the progress con­tin­ues but at a slower pace.

In the Mid­dle East, the for­ward march has been re­lent­less. The value of pay­ments done in yuan in the United Arab Emi­rates, for ex­am­ple, grew 211 per­cent be­tween Au­gust 2014 and Au­gust 2016.

In the UAE, more than 81 per­cent of pay­ments into the Chi­nese main­land and Hong Kong are al­ready car­ried out in yuan com­pared to just 11 per­cent in Ger­many, where 80 per­cent of pay­ments into China are in euros.

But the growth in mar­ket share, rapid as it has been, is likely to flat­ten out with much of the low-hang­ing fruit al­ready taken up.

SWIFT’s Moon pointed out that the gap in the value of pay­ments be­tween the yuan and the yen, the world’s fourth most-used cur­rency, re­mains quite large at 2.03 per­cent of to­tal pay­ments ver­sus 3.53 per­cent, as of Septem­ber.

Much of the growth to date has been driven by the ex­pan­sion of Chi­nese cor­po­rates glob­ally, with banks fol­low­ing them around the world and pro­vid­ing ser­vices. So far, how­ever, most of these ser­vices have been aimed at Chi­nese com­pa­nies rather than in­ter­na­tional ones. The shift is likely to take some time.

At the same time, the per­cep­tion that China is will­ing to spread the yuan glob­ally in the form of cheap loans and vir­tu­ally free credit is not ex­actly based in re­al­ity, said Ben Simpfendor­fer, man­ag­ing di­rec­tor at eco­nomics con­sul­tancy Silk Road As­so­ciates.

“It is not free money,” said Simpfendor­fer, who is also the au­thor of two books on the Chi­nese econ­omy. “It is cheap, when there is a com­pelling rea­son to do a deal … China is just more risk averse.”

The per­cep­tion that China is out there hand­ing out money with no strings at­tached is a hang­over of a by­gone era, he said.

“China is cer­tainly not buy­ing up Africa or Latin Amer­ica. (The idea) is a legacy of the last decade (when) it was chas­ing re­sources. It was an im­ma­ture in­vest­ment strat­egy.”

Even if China has be­come savvier and more care­ful in how it pours yuan around the world, more coun­tries and com­pa­nies are using the cur­rency ev­ery day. The growth of the yuan’s in­ter­na­tion­al­iza­tion con­tin­ues at a rapid pace.

Since Oct 1, the yuan has of­fi­cially be­come part of the elite spe­cial draw­ing rights bas­ket of the In­ter­na­tional Mone­tary Fund, along­side the dol­lar, euro, pound and yen. The yuan makes up 10.9 per­cent of the bas­ket.

The in­clu­sion is likely to en­cour­age cen­tral banks to in­crease their yuan re­serves. This could amount to a few hun­dred bil­lion dol­lars in the com­ing years.

Known as the Cur­rency Com­po­si­tion of Of­fi­cial For­eign Ex­change Re­serves, the to­tal value of for­eign ex­change held by cen­tral banks around the world adds up to to $7.2 tril­lion.

The dol­lar ac­counts for about two-thirds of this and the euro about 20 per­cent, with the yen and pound tak­ing up about 5 per­cent each. Should the yuan hit the level of the last two, it could see cen­tral banks stock­pile as much as $360 bil­lion in yuan­de­nom­i­nated sav­ings.

For all the progress, how­ever, the yuan has a long way to go be­fore it takes up a share of pay­ments glob­ally that is com­men­su­rate with the size of the Chi­nese econ­omy.

Some 1.86 per­cent of global pay­ments by value are done in yuan, but the coun­try’s econ­omy ac­counted for 16.32 per­cent of global GDP as of 2014, up from 9.68 per­cent a decade ear­lier and four times as much as a quar­ter of a cen­tury ago.

By com­par­i­son, the US share of global GDP, in terms of pur­chas­ing power par­ity, in 2014 was 16.14 per­cent, down from 19.64 per­cent a decade ear­lier and 22.28 per­cent 25 years ago.

Japan, the next largest econ­omy, ac­counts for 4.4 per­cent of global GDP.

Look­ing through the lens of cur­rent prices, an­other way to mea­sure GDP, the US has by far the largest share of global GDP at 24.5 per­cent while China ac­counts for 15 per­cent. In ei­ther case, China’s share of the global econ­omy would sug­gest that use of the yuan must ex­pand.

Re­forms have helped shore up con­fi­dence in the sta­bil­ity of the yuan and its vi­a­bil­ity as a re­serve cur­rency, not­with­stand­ing the drops. High lev­els of cor­po­rate debt in China are a con­cern and there are wide­spread ex­pec­ta­tions of fur­ther slow­downs in eco­nomic growth.

“Of­fi­cials at the (Peo­ple’s Bank of China) have, since Jan­uary, kept send­ing out sig­nals that they will keep a pru­dent mone­tary pol­icy and they don’t in­tend a pro­tracted weak­en­ing of the yuan,” said Liu Li­gang, man­ag­ing di­rec­tor and chief China econ­o­mist at Cit­i­group.

He said the cen­tral bank also aims to en­sure that sud­den de­pre­ci­a­tion of the yuan, as hap­pened in Au­gust last year, will not hap­pen again.

“The re­lated gov­ern­ment poli­cies also help sta­bi­lize mar­ket ex­pec­ta­tions.”

That sta­bil­ity, the in­clu­sion of the yuan in the spe­cial draw­ing rights bas­ket and China’s in­flu­en­tial po­si­tion in global pol­i­cy­mak­ing should all bol­ster the role of the cur­rency in global trade and fi­nance.

“I think the mar­ket has over­priced the risk in China and does not price in the more open cap­i­tal mar­ket to for­eign in­vest­ment,” said Liu.

Around the world, more bonds are be­ing is­sued in yuan by govern­ments and com­pa­nies.

Mar­kets oc­ca­sion­ally still get ner­vous about sud­den drops in the value of the cur­rency. In Au­gust 2015, the Peo­ple’s Bank of China ad­justed the value of the yuan down­ward by 2 per­cent in a day.

In­vestors were spooked and cap­i­tal out­flows spiked. Since then, how­ever, both out­flows and the value of the Chi­nese cur­rency have sta­bi­lized. The trend is vis­i­bly to­ward a weaker yuan but also to­ward greater sta­bil­ity.

“It is be­com­ing more mar­ket driven and so, in that sense, it is help­ing to re­duce some of the im­bal­ances in China,” said Alais­tair Chan, an econ­o­mist at Moody’s An­a­lyt­ics. “It is in­ter­est­ing that it has con­tin­ued to de­pre­ci­ate even though the out­flows have slowed down.”

This sta­bil­ity, said Chan, should help with the yuan’s on­go­ing global ex­pan­sion, al­though he be­lieves that af­ter the rapid mo­men­tum in re­cent years, a slow­down is in the off­ing. He ex­pects the cur­rency to re­main at or around the fifth spot glob­ally for some time.

“I would not be sur­prised if it stayed there for the next cou­ple of decades,” he said.

head of pay­ment mar­kets for Asia Pa­cific at SWIFT

AFP

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