RMB gains ground as global trade currency
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."