China’s yuan increasingly popular for settling international trade deals

China’s currency is gaining significant importance in international trade as the yuan’s share as a global trade settlement currency continues to grow, despite the shrinking overall trade pie amid China’s weakening exports to western countries.

The Standard Chartered Renminbi Globalisation Index, the UK bank’s proprietary measure of international yuan usage, rose 26.6 per cent in 2022, topping the 18.5 per cent growth recorded in 2021, Standard Chartered said in a recent research note.

“This is no small feat, in our view, considering the impact on market sentiment from strong headwinds such as rising global rates, US dollar strength, global geopolitical uncertainties, local Covid disruptions and slowing China growth,” Kelvin Lau, Standard Chartered’s senior economist for greater China, and Edward Pan, the bank’s China macro strategist, said in the report.

“We see this as a conviction that renminbi [yuan] internationalisation remains on a multi-year uptrend, with the drivers likely broadening beyond the Dim Sum [bonds] market in 2023, starting with a rebound in foreign holdings of onshore equities.”

Although the RGI fell for two straight months to 3,366 in January, it had risen for seven consecutive months to a record of 3,452 in November.

Three of the five RGI components contributed to the latest drop, including cross-border payments, which was partly dragged down by slower production and trade activity around the Chinese New Year.

The Dim Sum bonds market – bonds denominated in Chinese currency and issued in Hong Kong – continued to do the heavy lifting, extending its “impressive streak of positive RGI contribution to 17 straight months”, said the report.

The popularity of the yuan to settle international trade deals signifies its growing importance

In 2022, $6.1 trillion worth of China’s crossborder payments and receipts were in yuan – up 15% on 2021

in the global financial system.

In 2022, 42.1 trillion yuan ($6.1 trillion) worth of the country’s cross-border payments and receipts were settled in the Chinese currency, up 15 per cent from the previous year, marking the fifth straight annual increase, Chinese news website Caixin Global said, citing a People’s Bank of China February report.

The share of yuan settlements in the total value of goods trade and foreign direct investment reached 18 per cent and 70 per cent, respectively, both hitting new highs in recent years, said the report.

Last month, China and Brazil reached a deal to trade in their own currencies – ditching the US dollar as an intermediary.

Chinese President Xi Jinping’s recent visit to Saudi Arabia is likely to open doors to “more diverse use of the renminbi for trade and investment over time”, Standard Chartered economists said.

“While … the rise of the socalled ‘petroyuan’ remains a long-term aspiration … the potential is clear as day, with China being the largest oil importer in the world and the Middle East welcoming China investment,” they said.