Trade transactions settled in the yuan may rise to $3 trillion a year by 2015 as China pushes for the wider use of its currency as an alternative to the dollar in business and finance, according to China Construction Bank Corp.
“The renminbi market makes perfect sense for many reasons and we believe it will explode,” Paul Schulte, Hong Kong-based global head of financial strategy at CCB International Securities Ltd., said in a telephone interview, referring to the currency by its alternative name. CCB International is a unit of China Construction Bank.
China Construction Bank, which helped organize the biggest number of bond sales in China this year, forecasts an increase from the current $19 billion a year of yuan-denominated trade transactions, or commercial transactions primarily paid for and financed using the yuan that don’t involve the dollar.
Demand for China’s currency is escalating as the economy grew 9.6 percent in the third quarter and Premier Wen Jiabao promotes the yuan’s role in trade. The currency has become more attractive since China ended a two-year peg to the dollar June 19, and investors bet on further gains beyond the 2.8 percent achieved so far versus the greenback.
“It’s natural for China to want to have control over its currency and the way to do that is to internationalize it,” Schulte said. Hong Kong will develop a liquid market in the yuan, to provide “loans to Brazilian or Argentinean companies for Chinese capital goods like locomotives, electric turbines or health-care equipment,” he said.
China, the world’s fastest-growing major economy, belongs to the so-called BRIC group of emerging economies which also includes Brazil, Russia and India. China is the South American nation’s largest trade partner.
Companies have borrowed around 616 billion yuan ($93 billion) from China’s domestic currency loan market this year, according to data compiled by Bloomberg. PT Bakrie Telecom, an Indonesian mobile-phone operator, and Sumitomo Mitsui Finance & Leasing Co., were among non-Chinese companies that signed yuan- denominated loans this year, the data show.
China also started allowing the yuan to trade against the Russian ruble yesterday, in a move designed to support further internationalization of the currency, according to Credit Agricole CIB. Regulators already permitted the yuan to trade in China against the dollar, euro, yen, British pound, Hong Kong dollar and Malaysian ringgit.
The addition “is being billed as a tool to ‘help develop yuan trade settlement,’ one of the key goals of Chinese currency policy,” Hong Kong-based senior economist Dariusz Kowalczyk wrote in note dated Nov. 22. “We expect further currencies to be added in the near to medium term, notably the won, the Singapore dollar and the rupiah.”
Foreign-exchange trading rose to $4 trillion a day on average, with the U.S. dollar’s share of trades shrinking and the share of Asia-Pacific currencies rising to 36 percent of daily trades, according to a Bank for International Settlements survey. That’s the region’s biggest share since the BIS started compiling the data in 1998, the September survey found.
Central banks around the world looking to diversify assets have begun to buy renminbi debt instruments “as a means of ownership of the currency,” Schulte said.
In August, regulators in Beijing allowed central banks to buy yuan bonds in China’s interbank bond market, while the Hong Kong Monetary Authority last month tapped an annual 200 billion yuan currency swap with China after demand for trade settlement using the currency exceeded expectations.
Malaysia’s central bank bought bonds denominated in yuan for its reserves in September, according to the Financial Times, while the Bank of Thailand announced plans to buy yuan- denominated bonds later that month.
“Renminbi debt will become a legitimate and worthwhile part of the reserve make-up of central banks,” Schulte said.
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