Yuan outperforms euro, becomes 2nd most popular trade finance currency

AFP Photo/Frederic J. Brown

Source: Russia Today

The yuan has replaced the euro to become the second most widely used currency in global trade in 2013, according to the SWIFT network responsible for international financial transactions.

The share of the yuan in global trade finance has jumped from 1.89 percent in January 2012 to 8.66 percent in the form of letters of credit and collections in October 2013, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) data shows.

The share of trade settlements in the euro fell from 7.87 percent to 6.64 percent in the same period. The US dollar still leads with 81.08 percent of foreign trade payments using the American currency in October.

The most active yuan users are Chinese and Hong Kong companies which account for about 80 percent of the total foreign trade operations in the yuan. The remaining 20 percent is spread among Singapore (12%), Germany (2%), Australia (2%) and other countries (4%).

"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, commented in a statement.

“I think it is more to do with using China as a carry trade – people want to get their money into China,” says Nick Verdi, Asia FX strategist at Barclays. “With global interest rates so low, China really is the only place where you can get such a large carry. Trade finance is one of the key avenues to take advantage of that.”

According to SWIFT, in October the yuan remained the world’s 12th most popular means of payment, its share decreased to 0.84 per cent from 0.86 per cent in September. Even though value of payments grew by 1.5% for the month, payments in all currencies rose by 4.6%

Hong Kong, the largest yuan hub outside China, has accumulated a record 782 billion yuan ($128 billion) in October. The same month the UK’s Chancellor George Osborne announced plans to make London an offshore banking center for the yuan.

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London to become Chinese offshore banking center

A flag hangs from the Bank of China offices in the City of London (Reuters/Toby Melville)

Source: Russia Today

Britain has relaxed stringent rules for Chinese banks willing to set up in London. Beijing in turn opened up its markets to British-based investors, marking the latest move to establish the yuan as one of the world’s key currencies.

“A great nation like China should have a global currency,”said UK Chancellor of the Exchequer, George Osborne, during his official five day visit to China. And the UK is gladly willing to contribute “through the international center of finance: London”.

Under the agreed pilot program, China sanctioned London-based investors to buy up to 80 billion yuan ($13.1 billion) of stocks, bonds and money market instruments directly, avoiding Hong Kong transactions, Reuters reports.

Meanwhile, Britain will let Chinese banks set up wholesale branches in London, easing regulations the country had imposed after the financial crisis broke out. Since 2008, Britain has insisted that most foreign lenders should set up their UK operations as "subsidiaries" rather than branches, which provides greater protection for depositors and taxpayers. Less regulation will be welcomed by Chinese lenders who have always complained the rules made it hard to operate in Britain, prompting them to move much of their business to Luxembourg.

On top of that, London and Beijing will trade the yuan against the dollar directly, avoiding the dollar.

"The Chinese currency, the renminbi [yuan], is not terribly well known in Britain at the moment. But over my lifetime I think it's going to become almost as familiar as the dollar, and I want British businesses involved in trading it, investing in it," Osborne told BBC television in China.

Currently London accounts for 62 percent of yuan trades outside China and Hong Kong, according to data from financial services provider SWIFT. The latest move will give the renminbi a firmer footprint in Europe and strengthen London's platform to develop the offshore RM (renminbi) bond market.

According to an HSBC forecast, within 5 years a third of China’s total trade will be in yuan, which will make it fully convertible and elevate it into the top 3 exchange currencies. According to data compiled by Bloomberg, the yuan has already strengthened 36 percent against the dollar and 47 percent versus the pound since 2005.