Yuan Passes Euro as 2nd-Most Used Trade-Finance Currency

China’s push to promote the yuan in the international market is starting to take root.

The yuan accounted for 8.66 percent of letters of credit and collections used in global trade finance in October, second only to the dollar and surpassing the euro’s 6.64 percent share, the Brussels-based Society for Worldwide Interbank Financial Telecommunication said in a statement yesterday.

China is seeking a greater role for the yuan in global trade and investment, loosening controls as part of its once-in-a-generation economic overhaul last month and signing agreements to trade the currency more freely with financial centers from London to Singapore. The world’s second-largest economy may grow 7.6 percent this year, compared with an average 1.09 percent for the Group of 10 developed nations, Bloomberg surveys show.

“The yuan is on the way to become a truly, truly gigantic market,” David Simmonds, the head of currency and emerging-market strategy at Royal Bank of Scotland Group Plc in London, said in a phone interview yesterday. “Volumes will continue to grow with the evolution of the offshore market and with broader liberalization.”

Less Intervention

The People’s Bank of China outlined plans last month to end daily currency intervention as China’s ruling Communist Party attempts to modernize the economy. HSBC Holdings Plc predicts the currency, which climbed to a 20-year high in October, will be the main tender of international trade after the U.S. dollar and euro by 2015.

“Overseas exporters are using the renminbi more as the contract currency to increase the attractiveness and competitiveness of goods or services sold to China,” Cynthia Wong, the Hong Kong-based head of emerging-market trading for Singapore and Hong Kong at Societe Generale SA, said in an interview.

China announced agreements this quarter to start direct currency trading between the yuan and both the British pound and Singapore dollar. Direct trading with the yen and Australian dollar started in the past two years. The European Central Bank and PBOC agreed in October to establish a bilateral currency swap line of as much as 350 billion yuan ($57.5 billion).

Yuan Gains

International use of the yuan is also increasing as China opens its capital markets. In the first nine months of this year, about 17 percent of the Asian country’s global business was settled in the currency, compared with less than 1 percent in 2009, according to Deutsche Bank AG, the world’s largest foreign-exchange trader.

Greater usage contributed to the yuan’s 2.3 percent jump versus the dollar this year, the biggest gain among Asia’s 12 most-active currencies tracked by Bloomberg. The yuan gained to 6.0802 per dollar on Oct. 25, the highest level since 1993, before closing today at 6.0916. It was pegged to the dollar until 2005, and now trades in a managed range against a currency basket, with different rates inside and outside China.

China will broaden the yuan’s daily trading band in an “orderly way” and accelerate moves to make it convertible with international currencies, People’s Bank of China Governor Zhou Xiaochuan said after a Nov. 9-12 Communist Party meeting, when reforms to the economic and political systems were announced.

Building Reserves

Deputy Governor Yi Gang said Nov. 20 that “it’s no longer in China’s favor to accumulate foreign-exchange reserves,” which totaled a record $3.66 trillion at the end of September, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

“What China is now going to do is move slowly toward a more market-oriented system,” Hans Redeker, the head of global currency strategy at Morgan Stanley in London, said in a phone interview yesterday. He recommended a long-yuan position in a Dec. 2 note. “By allowing more and more” business to settle in yuan, the Chinese currency’s prestige “is going to rise,” he said. “This is a process that’s going to continue.”

The yuan had the fourth-largest share of global trade finance back in January 2012 with 1.89 percent, while the euro’s was the second-biggest at 7.87 percent, Swift said. The U.S. dollar remained the most-used currency in October, with an 81.08 percent share, down from 84.96 percent in 2012. Japan’s yen fell to fourth place and 1.36 percent, from third and 1.94 percent.

Rising Deposits

China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance in October, according to Swift. Yuan deposits in Hong Kong, the largest pool outside China, rose in October by the most since April 2011, reaching a record 782 billion yuan, Hong Kong Monetary Authority data show.

“The renminbi is clearly a top currency for trade finance globally and even more so in Asia,” Franck de Praetere, Swift’s Singapore-based head of payments and trade markets for Asia Pacific, said in the statement, referring to another name for China’s currency.

The yuan still has a way to go before it rivals the main currencies for general business. The Chinese currency ranked No. 12 for transactions in the global payments system in October, unchanged from the previous month, according to Swift. Payment values rose 1.5 percent that month, less than the 4.6 percent growth for all currencies, reducing the yuan’s market share to 0.84 percent, from 0.86 percent in September.

The yuan was the ninth most-traded currency in the world in April, according to the Bank for International Settlements in Basel, Switzerland.

“The constraints to use the yuan have been in the past the lack of liquidity, the dearth of investment options and the inability to invest onshore,” David Loevinger, a former U.S. Treasury official for Chinese affairs and now an analyst at TCW Group Inc. in Los Angeles, said by phone yesterday. “This is all changing little by little.”

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