China’s volume of international transactions that cleared in its own yuan currency tumbled on fading confidence in its financial stability by 12.31 percent in October 2019.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) reported that despite the volume of international payments was up by a brisk 4.17 percent in October over September, the volume of cross-border transactions conducted in China’s yuan currency was down 12.31 percent. SWIFT tracks global interbank transactions for more than 11,000 financial institutions in over 200 countries.
October was expected to be an extraordinarily strong month for yuan transactions following the launch of a global financial markets “connect” trading programs with the Hong Kong Exchange; Morgan Stanley Capital adding China domestic securities to its stock market indexes; and the People’s Bank of China cutting its one-year Loan Prime Rate of interest to stimulate the domestic economy.
The rise of yuan usage had allowed China to internally finance substantially more trade payments without being forced to post collateral with Eurodollar banks to guarantee the exchange of yuan into U.S. dollars for complete customer payments. Wall Street credited the rise of yuan transaction volumes as a tangible sign of China’s financial stability.
But SWIFT reported that combined with a similar double-digit decline in September, the percentage of international currency transactions conducted in yuan after peaking at 2.22 percent in August, has plunged by almost -27 percent over a two-month period. The United States dollar continues to dominate international currency transactions with a market share in October of 40.64 percent of total transaction volumes.
The global currency transactions ranking for China’s yuan dropped from fifth to sixth place in October, falling below the Canadian dollar. Given that China has about thirty times the population and its economy is over ten times the size of Canada’s, very large back-to-back declines represent an increasing lack of confidence by the international financial community in the stability of China and its currency.
Enodo Economics’ Diana Choyleva, who coined the term “China Decoupling,” stated at Bloomberg’s New Economy Forum last year that the current era represents: “The first time ever on a global stage that we had the amalgamation of a command economy with a market economy and the way we fused them, setting the system of trade and capital flows along the lines of the liberal free market has actually not worked.”
Choyleva emphasized that the relationship between the liberal Western democracies and China authoritarian system failed, because the benefits were not symbiotic. She blames the Global Financial Crisis and 10 years of weak growth that followed on China’s restricting of domestic consumption. As a result, Western private sector jobs have been massively transferred to China’s state-owned enterprises.
According to George Friedman of Geopolitical Futures, the Chinese Communist Party (CCP) appears to be losing confidence in its leader Xi Jinping, who initially used his massive anti-corruption campaign as a “cover for a systematic purge of real and potential mainland opponents, before demanding that Hong Kong pass a radical extradition law that could subject citizens to being swept up and sent to mainland reeducation camps.”
Friedman suspects that government documents that surfaced last weekend validating a broad multi-year persecution campaign on the ethnic minority Uyghur community in Xinjiang may have been “released by senior members of the Chinese government who have become disillusioned by President Xi Jinping, hoping to force him out.”
The timing of the release came as the U.S. Congress signed off on two bills related to the protests in Hong Kong that once signed into law by President Trump, would “require the U.S. State Department to annually certify whether the rule of law, human rights, and agreements on the region’s autonomy are being sufficiently upheld to warrant its special treatment by the United States to “retain its status as a global financial hub.”
Given that three-quarters of China yuan currency transactions are conducted in Hong Kong, such a financially disruptive move could disrupt China’s external trade and internal security.
Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with more than 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.