RMB gains ground as global trade cur­rency

The Pak Banker - - COMPANIES/BOSS -

Yuan con­tin­ues to gain fa­vor af­ter in­clu­sion in the IMF's SDR Bas­ket and Im­ple­men­ta­tion CBIS. The end of 2015 was piv­otal for the RMB, as it was in­cluded in the In­ter­na­tional Mon­e­tary Fund's (IMF) Spe­cial Draw­ing Rights cur­rency bas­ket, so­lid­i­fy­ing its sta­tus as a global re­serve cur­rency. Fol­low­ing nu­mer­ous steps to lib­er­alise its cap­i­tal ac­count and im­prove open­ness, the coun­try's cur­rency fi­nally met the IMF's cri­te­ria for abil­ity to be used freely.

The RMB is as­signed a weight of 10.92 per­cent, mak­ing it the most heav­ily-weighted com­po­nent of the bas­ket be­hind the US dol­lar and the Euro. The re­cent move to in­clude the Yuan in the cur­rency bas­ket em­pha­sises the con­tin­u­ously in­creas­ing sig­nif­i­cance that Asia has to global trade, with its largest econ­omy's cur­rency be­ing deemed a uni­ver­sal store of value. Ac­cord­ing to SuanTeck Kin, an an­a­lyst at UOB, "the RMB's sta­tus is now el­e­vated to that of ' re­serve cur­rency'. This means that cen­tral banks and other as­set man­agers would need to ad­just their port­fo­lio al­lo­ca­tion to ac­com­mo­date RMB­de­nom­i­nated as­sets.

As the num­ber of com­pa­nies in Asia in­creases, there is also an in­creas­ing num­ber of firms that do not do busi­ness with Western coun­ter­par­ties. The in­creas­ing eco­nomic ac­tiv­ity in Asia means that an ever larger part of trade is be­ing kept within the re­gion, and it makes no sense for th­ese firms to be trans­act­ing in western cur­ren­cies.

With the ren­minbi's con­tin­ued push to­wards be­com­ing a global cur­rency, it is in­creas­ingly be­com­ing a pre­ferred medium of ex­change for com­pa­nies in Asia. Fi­nan­cial ser­vices providers are be­gin­ning to take no­tice, in­creas­ing the scope and va­ri­ety of RMB-de­nom­i­nated prod­ucts and ser­vices, par­tic­u­larly in the trade fi­nance busi­ness seg­ment. The grow­ing rel­e­vance of the yuan is only a small part of the larger trend of Asia be­com­ing a much more sig­nif­i­cant con­trib­u­tor to global trade.

De­spite China's sta­tus as the world's largest ex­porter, the RMB ac­counted for less than 2 per­cent of global pay­ments in 2014, ac­cord­ing to Ernst & Young Bank­ing & Cap­i­tal Mar­kets GEM leader, Jan Bel­lens. Pre­vi­ously, there was a per­sis­tent gap be­tween the con­tri­bu­tion of China to trade and the fa­cil­i­ties pro­vided by stake­hold­ers to trans­act in a more rel­e­vant cur­rency.

"This is cur­rently chang­ing in fa­vor of China with the launch of its first phase of the Cross-bor­der In­ter­bank Pay­ment Sys­tem (CIPS) in Oc­to­ber", ac­cord­ing to Bel­lens. He says that this fa­cil­ity al­lows in­sti­tu­tions to "en­joy clear­ing ser­vices and cap­i­tal set­tle­ment for cross-bor­der yuan trans­ac­tions with­out us­ing an off­shore clear­ing cen­tre."

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