China’s yuan overtook the euro to become the second-most used currency in global trade finance after the dollar this year, according to the Society for Worldwide Interbank Financial Telecommunication.
The currency had an 8.66% share of letters of credit and collections in October, compared with 6.64% for the euro, Swift said in a statement today. China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance, according to the Belgium-based financial- messaging platform.
The yuan had the fourth-largest share of global trade finance in January 2012 with 1.89%, while the euro’s was the second-biggest at 7.87%, Swift said.
“It’s true that overseas exporters are using the renminbi more as the contract currency to increase the attractiveness and competitiveness of goods or services sold to China,” said Cynthia Wong, the Hong Kong-based head of emerging-market trading for Singapore and Hong Kong at Societe Generale SA.
The U.S. dollar led all currencies with an 81.08% share of letters of credit and collections in October, down from 84.96% in January 2012, according to data compiled by Swift. The yen slipped from the third-most used global currency to fourth over the same period, declining from a 1.94% share to 1.36%.
China is seeking a greater role for its currency in global trade and investment as the state loosens controls on the exchange rate and borrowing costs in the world’s second-largest economy. People’s Bank of China Deputy Governor Yi Gang said Nov. 20 it is no longer in the nation’s interest to keep building up its foreign-exchange reserves, which totaled a record $3.66 trillion at the end of September.
Yuan deposits in Hong Kong, the largest pool outside China, rose the most since April 2011 to a record 782 billion yuan ($128 billion) in October. Agreements were announced this quarter to start direct currency trading between the yuan and both the British pound and Singapore dollar.
“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.
The Chinese currency ranked No. 12 for transactions in the global payments system in October, unchanged from the previous month, according to Swift figures. Payment value for the currency rose 1.5% that month, less than the 4.6% growth for all currencies, the Swift data showed. That saw the yuan’s market share drop to 0.84% from 0.86% in September.
Daily yuan transactions surged to $120 billion in April from $34 billion in 2010, making it the ninth most-traded currency in the world, according to a September report by the Bank for International Settlements in Basel, Switzerland.
The yuan has appreciated 2.3% against the greenback this year, the best performance in Asia, according to data compiled by Bloomberg. The currency closed at 6.0924 per dollar today in Shanghai, little changed from yesterday.
China accounted for 59% of the trade finance denominated in yuan in October and Hong Kong’s share was 21%, Swift data showed. Singapore had 12% with Germany and Australia having 2% each.
“I’m not surprised as cross-border trades between China and Hong Kong have been quite dominantly denominated in yuan,” Raymond Yeung, a Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd., said by phone today. “Yuan trades usually increase when there are strong expectations for yuan appreciation.”
International use of the yuan is increasing as China opens up its capital markets. In the first nine months of this year, about 17% of China’s global trade was settled in the currency, compared with less than 1% in 2009, according to Deutsche Bank AG.
China and the U.K. will begin direct trading between the yuan and the British pound, Chancellor of the Exchequer George Osborne said on Oct. 15. China also approved an 80 billion yuan quota allowing investors in London to buy onshore assets. Singapore inked a similar agreement with China a week later. Direct trading between the currencies of Japan and Australia started in the past two years.
The European Central Bank and the People’s Bank of China agreed to establish a bilateral currency swap line of as much as 350 billion yuan, the Frankfurt-based central bank said in October.
The Chinese central bank limits the yuan spot rate’s daily moves to 1% on either side of a fixing it sets every day. The trading band was widened in April 2012, after being expanded from 0.3% in May 2007. The yuan in Shanghai has traded 0.7% stronger than the fixing on average this quarter, down from 0.8% in the first nine months of the year, according to data compiled by Bloomberg.
The People’s Bank of China will “basically” end normal intervention in the foreign-exchange market and broaden the yuan’s daily trading limit, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined following a Communist Party meeting that ended Nov. 12.