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 (RGI), 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-high 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 Lunar New Year.
The Dim Sum bonds market — bonds denominated in Chinese currency and issued in Hong Kong — also continued to do the heavy lifting, extending its “impressive streak of positive RGI contribution to 17 straight months”, according to the report.
The popularity of the yuan to settle international trade deals signifies its growing importance 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, according to the report.
At the end of last month, China and Brazil reached a deal to trade in their own currencies, ditching the US dollar as an intermediary, the Brazilian government said.
The deal will enable China, the top rival to US economic dominance, and Brazil, the biggest economy in Latin America, to conduct their massive trade and financial transactions directly, exchanging yuan for reals and vice-versa, instead of going through the dollar.
China, the world’s second-largest economy, has similar deals with Russia, Pakistan and several other countries.
In February, the Central Bank of Iraq announced plans to allow trade with China to be settled directly in the yuan currency for the first time to improve its access to foreign currency.
While a Gulf-China FTA has been on the table for nearly two decades, the deal received fresh impetus after China’s new Foreign Minister Qin Gang, in February, called for it to be finalised “as soon as possible” during a telephone conversation with Saudi Arabia’s Foreign Minister Prince Faisal bin Farhan.
A GCC-China FTA could be signed as early as this year, Nasser Saidi, president of Nasser Saidi & Associates and former chief economist of the Dubai International Financial Centre, said at the time.
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.
During the trip, Mr Xi mentioned making a full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade.
He also proposed oil and gas settlements denominated in the yuan with the GCC countries within three to five years.
“While we believe the rise of the so-called ‘petroyuan’ remains a long-term aspiration rather than an instant game-changer [currently, Saudi-related Swift messaging volume in Renminbi, for example, is not even 1 per cent of Russia’s], the potential is clear as day, with China being the largest oil importer in the world and the Middle East welcoming China investment to help with its economic diversification,” Standard Chartered said.
The lender said the RGI tracks the change in cross-border yuan usage in absolute terms, making it “vulnerable to prolonged weakness in overall external trade flows — a risk in the coming quarters as US and European growth is likely lose momentum from prior aggressive tightening".
“We, however, continue to take comfort from the fact that renminbi-settled goods trade stayed high as a share of total China goods trade, at 20.1 per cent in Q4-2022 versus 19.7 per cent in Q3, maintaining its gain from H1’s 17.6 per cent average,” Standard Chartered economists said.
“Having bottomed at 11.8 per cent in 2017, this also pushed the 2022 full-year average to 18.8 per cent after failing to rise above 15 per cent in 2020 and 2021.”