Friday, July 11, 2014

Developments on the Renminbi Becoming a Reserve Currency

Sometime ago I began to track bilateral currency swap agreements between China and its trading partners. (See this blog and others that precede it.) The idea was that this trend could be the beginning of the Chinese yuan becoming a global currency and qualify as a reserve currency. Some recent developments provide some indicators of the progress the Renminbi has made towards this end.

Recent WSJ article reported on the increase use of Renminbi (RMB) instead of dollars to settle their cross border transactions. The US has surpassed Taiwan to become the fourth largest trading hub for the yuan, after Hong Kong, Singapore and U.K. To put this into perspective, Hong Kong accounts for 71% of all the world wide payments in yuan, Singapore 6.8% and London 5.9% while the U.S. only 2.6%.

The next day, China Daily followed with a related story on use of RMB. According to HSBC, about 17% of the U.S. companies settled their trade in RMB this year, nearly double the previous year. though it is below the global average of 22%. Poll of German companies revealed that 23% of the companies settled their accounts in RMB, a jump from mere 9% in 2013.

Reasons for for using the yuan include lower cost of doing business and better pricing. Not long ago, the Chinese seller would rather get paid in dollars but apparently no longer. It's a reflection of the confidence in the stability of the RMB that they now prefer to get paid in their own currency and not to have to worry about exchange rate fluctuations.

So is the RMB ready to take over as a preferred reserved currency? A paragraph from the WSJ article says not yet: Usage of the yuan has taken off globally. More than 18% of China's total trade is paid for in the currency, up from less than 1% give years ago, according to Bank of China Ltd. The Bank for International Settlements reported last year that the yuan is now the ninth most actively traded currency in the world.

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