Yuan Makes Inroads in International Finance
China’s national currency, the yuan, has overtaken the euro in some segments of international finance as the currency of choice.
The yuan overtook the euro recently in financing for letters of credit and collections, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a network for international financial communication.
The yuan’s rise underscores the importance of East Asia in international trade and commerce.
“The RMB (yuan) is clearly a top currency for trade finance globally and even more so in Asia, as shown by SWIFT’s business intelligence
statistics on the pace at which China’s exporters and importers and their counterparts use the RMB for Letters of Credit,” said Franck de Praetere of
Nearly 9 percent of the so-called letters of credit (LOC)—which are standardized documents for commercial transactions, including payment obligations—are now based on the yuan. In January 2012 only less than 2 percent of LOCs were yuan-denominated.
The dollar is the only currency that is used more frequently in this market segment—but to a much greater extent. The U.S. dollar accounts for more than 80 percent. The euro’s share accounts for almost 7 percent. The fact that the dollar accounts for the majority of this market segment is due to the fact that the majority trading in commodities takes place in dollars.
Rise of China
The rise of the yuan reflects the growing economic importance of China and the rise of Chinese exports. As the world’s second-largest economy, China is seeking a greater role for its currency in global trade and investments as the Chinese state continues to loosen controls on the exchange rate.
“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University on Nov. 19. Yi added, “Most people are happy (about the yuan’s rise), but they don’t express their views. There is also a minority that is unhappy, but they can be quite vocal.”
According to Bloomberg, the yuan appreciated 2.3 percent against the dollar this year, the best performance among 24 emerging-market currencies tracked by Bloomberg.
Yi stated at the same speech that the yuan’s real exchange rate has risen about 39 percent since exchange-rate reform in July 2005. Chinese Communist Party leaders concluded a key policy-setting meeting in mid-November and faster opening of the capital account was one of the main financial-sector objectives.
The yuan’s strengthening has also increased the price of Chinese exports and decreased the country’s competitiveness as the world’s factory. Companies are increasingly turning to other Asian nations such as Indonesia, Malaysia, Thailand, and India for their manufacturing.
But China isn’t fazed. According to the Wall Street Journal, Chinese policymakers are also keen to let the market play a bigger role in determining the yuan’s exchange rate.
Zhou Xiaochuan, the governor of the People’s Bank of China, has also said the central bank wants to phase out routine intervention in the foreign-exchange market, according to the Wall Street Journal report.