Yuan faces battle to win over foreigners
Companies remain sceptical
Even as the International Monetary Fund (IMF) prepares to accept China’s yuan in its basket of reserve currencies – a major diplomatic victory for Beijing’s currency – foreign firms grow more sceptical.
Thanks to recent reforms in China and the endorsement of key European governments, including Britain when President Xi Jinping visited last month, the yuan looks likely to find its way into the IMF reserve basket, known as Special Drawing Rights.
Diplomatic coups
The IMF’s approval would come on top of other diplomatic coups: European endorsement of Beijing’s new regional development bank – another channel for pushing the yuan – and the recent announcement of a trading platform for yuan-denominated financial products in Germany.
“It’s a big step,” said an executive at a Chinese multinational in Hong Kong, who said he expected it would make his foreign counterparts more willing to settle bills in yuan.
So far this year, foreigners willingness to hold offshore yuan (CNH) has flagged, as China cuts interest rates and the US prepares to raise them.
Under depreciation pressure, CNH interest rates have risen above onshore rates, overseas yuan deposits have fallen, and issuance of offshore yuan bonds has slowed.
Though raw figures show international payments using yuan have risen steadily. The People’s Bank of China (PBOC) said 27 percent of China’s trade was settled in yuan in the first nine months of the year, compared with 22 percent for all of 2014. The currency was competing with Japan’s yen, said pay system operator Swift.
The amount of foreign trade paid in yuan to October
But such figures exaggerate the yuan’s popularity overseas.
About three in four of payments captured by Swift are not international, crossing between China and Hong Kong.
The data does not show what portion of these transactions involve foreign firms’ Hong Kong subsidiaries, as opposed to internal transfers within Chinese conglomerates.
And Chen Long, an economist at Gavekal Dragonomics in Beijing, said the trade settlements were driven mostly by foreign clients paying Chinese exporters in yuan, reducing their exposure to depreciation.
“Yuan payments continue to rise but exports are rising faster than imports. That’s how offshore deposits are falling.”
Waning appetite for yuan is partly due to the PBOC’s surprise decision to devalue the currency in August.
Intervening
Since then the bank has moved to restore confidence, intervening onshore and off to hold the currency steady. But there’s more to foreign caution than short-term worries about the currency rising or falling.
Governments may be concerned about economic overdependence on the dollar, but company executives are not. Many still see little profit in switching from dollar to yuan given cost and risk.
“Our contracts are denominated in US dollars, regardless of the customers’ domicile,” said Phil Hughes, a director of Technical PR at microprocessor maker ARM, which is also enjoying rising sales to China.
The Hong Kong multinational executive thinks overseas companies will eventually come round.
“They can’t ignore the increasing importance of the yuan,” he said. “But it can’t be achieved overnight.”