The yuan overtook Canada’s dollar to rank fifth for use in global payments, bolstering the case for the International Monetary Fund to endorse it as a reserve currency.
The proportion of transactions denominated in yuan climbed to a record 2.17 percent in December, from 1.59 percent in October, the Society for Worldwide Financial Telecommunications said in a statement. Later this year, the IMF will conduct the next twice-a-decade review of the basket of currencies in its Special Drawing Rights that members can count toward their official reserves. The basket currently comprises U.S. dollars, euros, yen and British pounds.
“The yuan has a very high chance of being chosen as a reserve currency in the next IMF review,” said Nathan Chow, an economist at DBS Group Holdings Ltd. in Hong Kong. “The yuan could even surpass the yen in the rankings this year.”
China is the world’s second-largest economy, behind only the U.S., as well as the biggest exporter, and the yuan passed the euro in 2013 to become the second-most used currency in global trade finance. The nation is promoting greater usage of its currency by appointing clearing banks in the world’s financial centers and expanding a program that allows yuan held offshore to be invested in its domestic capital markets.
The dollar and the euro remained the two most-used currencies globally in December with respective shares of 44.6 percent and 28.3 percent, according to Swift, a Belgium-based financial-messaging platform. The pound ranked third with 7.92 percent and Japan’s yen was fourth with 2.69 percent.
The People’s Bank of China will promote yuan internationalization in an orderly way this year, according to a Jan. 20 statement published on its website. More than 50 global central banks and monetary authorities already hold yuan as part of their reserves, DBS’s Chow said.
The Singapore dollar became directly exchangeable for yuan in Shanghai in October, adding to direct trading links China’s currency had with the U.S., Australian and New Zealand dollars, the pound, the yen and the euro. Switzerland and China last week agreed to establish yuan clearing in the European country, expanding a network that’s grown to include London, Paris, Sydney and Bangkok in the past seven months.
The yuan capped its biggest two-day drop against the dollar since 2008 on Monday, as a slide in the euro bolstered demand for the greenback. The euro sank to a 13-year low versus the yuan after the European Central Bank announced a bond-buying program and a weekend election in Greece boosted the risk the country will leave the 19-nation currency.
The yuan fell 0.07 percent to close at 6.2480 a dollar in Shanghai Wednesday. The currency sank to a record 1.93 percent discount to the central bank’s daily reference rate, near the 2 percent limit of the current exchange-rate system. It gained 0.17 percent on Tuesday, rebounding from a 0.71 percent decline in the previous two trading days.
China’s economy expanded 7.4 percent last year, the slowest since 1990. Growth will decelerate further to 7 percent this year, according to the median estimate in a Bloomberg survey. Moody’s Investors Service said in a Jan. 22 report that shadow-banking assets reached 45 trillion yuan at the end of 2014, rising to 71 percent of gross domestic product from 66 percent.
“The expectation that the yuan will depreciate will make it less attractive in the international market,” said Zhu Lixu, a Shanghai-based strategist at Xiangcai Securities Co. “China’s economy hasn’t touched bottom, and it hasn’t resolved problems of its expanding shadow-banking market and local government debt. So there are still lots of uncertainties that could cloud the IMF’s decision at the end of this year.”
As China seeks reserve-currency status for the yuan, it’s unlikely to allow sharp declines and may even favor a modest appreciation trend, according to Liu Hong, an economist at BOC Hong Kong Holdings Ltd. The nation’s two-year sovereign bond yield of 3.12 percent compares with minus 0.16 percent for Germany and minus 1.01 percent for Switzerland.
“If the euro continues weakening and involves a cost to hold, other central banks will be looking for alternatives,” Davis Hall, global head of foreign exchange and precious metals advisory at Credit Agricole SA’s private-banking unit, said in a Jan. 28 phone interview. The yuan emerges as “a more and more viable” option as the PBOC is likely to keep a liquid trading environment for the currency, while it’s impossible that China will have negative interest rates, he said.