China’s effort to challenge the hegemony of the U.S. dollar just got a boost from JPMorgan Chase & Co.
For the first time in 15 years, the New York-based bank increased the yuan’s weighting in its foreign-exchange indexes, meanwhile lowering the dollar’s, to reflect China’s surging share in global trade. The U.S.’s weight for cross-border commerce fell an average of 7.6 percentage points from 2000 to 2013, while China’s rose 13.1 percentage points, JPMorgan said.
“The big picture behind all these indices have changed, China’s share of global trade has probably tripled in the last decade,” Gabriel de Kock, a JPMorgan economist in New York, said in a phone interview. “There’s an amazing asymmetry in the renminbi’s role.”
JPMorgan’s changes are emblematic of China’s campaign in making the yuan a suitable currency for international trade and finance. While the world’s second-biggest economy has made progress over the past five years to encourage its use, the yuan still isn’t included in the International Monetary Fund’s reserves and the U.S. is yet to allow full trading of the Chinese currency on its soil.
JPMorgan is joining a growing number of companies and central banks in reconciling the yuan’s limited adoption with China’s role in world trade and commerce. Since 2010, more than a dozen countries, including the U.K. and Singapore, have allowed companies for the first time to settle accounts with Chinese partners during local business hours in the $5.3 trillion-a-day currency market.
The U.S., the world’s biggest capital market, is holding back. Only 10 percent of U.S. firms have received and paid proceeds in yuan, compared with a global average of 17 percent, according to a survey by HSBC Holdings Plc last month.
The dollar’s dominance makes it difficult for the yuan to make breakthroughs in its home market, Chen Xu, chief executive officer at Bank of China U.S.A., a unit of the country’s fourth-biggest lender, said in an interview on Tuesday.
While an increasing number of American companies are showing interest in adopting the yuan, they are reluctant because of the costs associated with the switch, Xu said.
“It is more challenging to push yuan’s internationalization in U.S.” said Xu. “But without the U.S., the yuan is not really internationalized.”
U.S. Treasury Secretary Jacob J. Lew said the Chinese currency is yet to deserve the reserve status the dollar enjoys. China must implement the “necessary reforms” before it will meet the IMF’s standards for inclusion in the basket of currencies, he said last month.
Lew’s reservations came at a time when China replaced his country as the world’s biggest trader in merchandise just two years ago, according to figures from the World Trade Organization. The Asian nation’s imports and exports totaled $4.2 trillion in 2013, compared with $3.9 trillion for the U.S.
Among major economies, while China’s weight increased, the share for the U.S., euro members and Japan all fell. The changes in trade-weighting feed into the proportion that different currencies account for in JPMorgan’s effective exchange-rate indexes that cover regions and individual countries.
China’s “entrance into the WTO in late 2001 has led to a sea-change in global trade patterns,” according to the JPMorgan report. “China’s rising prominence in global trade has come largely at the expense of the U.S., and to a lesser extent Western Europe and Japan,”