How the Chinese yuan rose to second place in the global currency hierarchy

According to Swift reports, the Chinese currency's transaction volume on the global payment system moved it up to twelfth position in October.

The Chinese yuan overtook the euro to become the second most used currency in global trade finance after the dollar in 2023, according to the Society for Worldwide Interbank Financial Telecommunication.

The currency accounted for 8.66% of letters of credit and collections in October, compared with 6.64% for the euro, Swift said. China, Hong Kong, Singapore, Germany and Australia were the biggest users of the yuan in trade finance, according to the Belgian financial messaging platform. In January 2012, the yuan ranked fourth in global trade finance with a share of 1.89%, while the euro was the second largest at 7.87%, Swift said. "It is true that overseas exporters are increasingly using the renminbi as a contract currency to enhance the attractiveness and competitiveness of goods or services sold to China," says Cynthia Wong, head of emerging markets trading in Singapore and Hong Kong at Societe Generale SA, based in Hong Kong.

The US dollar led all currencies with a share of 81.08% of letters of credit and collections in October 2023, up from 84.96% in January 2012, according to Swift data. Over the same period, the yen fell from the third most used world currency to the fourth, reducing its share from 1.94% to 1.36%. Yuan deposits China is seeking to boost its currency's role in global trade and investment as the government loosens controls on the exchange rate and borrowing costs in the world's second-largest economy.

Deputy Governor of the People's Bank of China I Gang said on November 20 that continuing to build up foreign exchange reserves, which stood at a record $3.66 trillion at the end of September, was no longer in the country's interests. RMB 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. This quarter, agreements were announced to begin direct trading of the yuan with the British pound and the Singapore dollar. “The renminbi is by far the leading currency for trade finance globally, and even more so in Asia,” said Frank de Preter, head of payments and trade markets for Asia Pacific at Swift, based in Singapore.

According to Swift, the Chinese currency ranked 12th in terms of transaction volume in the global payments system in October, unchanged from the previous month. The cost of payments in the currency rose 1.5% that month, less than the 4.6% increase for all currencies, according to Swift data. As a result, the yuan's share of the market fell to 0.84% ​​from 0.86% in September. Chinese currency trading volume Daily yuan transactions rose to $120 billion in April from $34 billion in 2010, making it the world's ninth most traded currency, according to a September report from the Bank for International Settlements in Basel, Switzerland.

The yuan has appreciated 2.3% against the US dollar this year, the best performance in Asia, according to Bloomberg. Currently, the Chinese currency exchange rate fluctuates between 6.09 and 6.10 per dollar, having changed little in recent weeks. China accounted for 59% of yuan-denominated trade finance in October, while Hong Kong's share was 21%, Swift said. Singapore accounted for 12%, Germany and Australia – 2% each. "I'm not surprised as cross-border trade between China and Hong Kong is quite often denominated in yuan," says Raymond Yong, Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd. “RMB trading tends to rise when there are strong expectations for the yuan to appreciate.”

Yuan Increasingly Used International use of the yuan is growing as China opens its capital markets. In the first 9 months of this year, about 17% of China's global trade was settled in the currency, up from less than 1% in 2009, according to Deutsche Bank AG. China and the UK will begin direct trading between the yuan and the British pound, Chancellor of the Exchequer George Osborne said on October 15. China has also approved an 80 billion yuan quota, allowing investors in London to buy onshore assets. Singapore entered into a similar agreement with China a week later. Direct trading between the currencies of Japan and Australia began over the past 2 years.

The European Central Bank and the People's Bank of China have agreed to establish a bilateral currency swap line worth 350 billion yuan, the central bank in Frankfurt am Main said in October. Trading Restrictions The Chinese central bank limits daily fluctuations in the yuan spot rate to 1% on either side of the fixed rate it sets daily. The trade corridor was expanded in April 2012. The yuan on the Shanghai currency exchange was trading 0.7% higher than its average this quarter, according to Bloomberg data. The People's Bank of China will largely bypass routine foreign exchange market interventions and expand the yuan's daily trading limit, Governor Zhou Xiaochuan wrote in a guidebook article explaining the reforms outlined after the Communist Party meeting that ended Nov. 12.

The scale of the Chinese economy and its rapid growth are astounding. For more than a quarter of a century, China has maintained some of the fastest economic growth in the world, helping lift more than 800 million people out of poverty in just a few decades. The country is the world's largest exporter and the most important trading partner of Japan, Germany, Brazil and many other countries. It has the second largest economy after the United States, based on market exchange rates, and the largest by purchasing power. Yet the yuan still lags behind the world's main currency, the US dollar. The war in Ukraine, which began in February 2022, may change that. This geopolitical conflict could push the Chinese currency into the next stage of its journey to become a global currency - and accelerate the beginning of the decline of the US dollar from its current dominance. China has long wanted to make the yuan a global power and has made significant efforts to do so in recent years.

For example, in 2015, the Chinese government launched the Cross-Border Interbank Payment System (CIPS) to facilitate cross-border RMB payments. Three years later, in 2018, it launched the world's first yuan-denominated crude oil futures contracts to allow exporters to sell oil in yuan. China has also become perhaps the world's largest lender, with the government and state-owned enterprises providing loans to dozens of developing countries. And China is developing a digital yuan as one of the world's first central bank digital currencies. Recently, even yuan trading hours were extended on the mainland.

US Dollar Dominance in Question The US dollar has reigned supreme as the world's primary currency for decades, and concerns about how this benefits the US and potentially harms emerging markets is nothing new. The value of the US dollar rose significantly against most other currencies in 2022 when the Federal Reserve raised the refinancing rate. This has had negative consequences for people in almost any country who take out loans in dollars, pay for imports in dollars, or buy wheat, oil, or other goods priced in dollars, since they all became more expensive. Following Russia's invasion of Ukraine in early 2022.

The United States and its Western allies have imposed sanctions on Russia, including limiting Russia's access to the global dollar payments system known as the Society for Worldwide Interbank Financial Telecommunications, or SWIFT. This clearly showed how the dollar can be used as a weapon. Since Russia has been significantly cut off from international financial markets, it has stepped up its trade with China. Russia began receiving payments for coal and gas in yuan, and Moscow increased the share of yuan in its foreign exchange reserves. Russian companies such as Rosneft have issued bonds denominated in yuan. According to Bloomberg, the yuan is now the most traded currency in Russia.

Other countries took notice of Russia's increasing use of the yuan and saw this as an opportunity to reduce their own dependence on the dollar. Bangladesh is currently paying Russia in yuan to build a nuclear power plant. France accepts payment in yuan for liquefied natural gas purchased from the Chinese state oil company. A Brazilian bank controlled by a Chinese state-owned bank becomes the first Latin American bank to directly participate in China's CIPS payment system.

Iraq wants to pay for imports from China in yuan, and British retailer Tesco has offered to pay for its Chinese imports in yuan. The aggregate dollar amount of these transactions is still relatively small, but the shift to the yuan is significant. China tightly controls the flow of money into and out of the country. These capital controls and the limited transparency of Chinese financial markets mean that China still lacks the deep and free financial markets needed to make the yuan a major global currency.

For the yuan to become a truly global currency, it must be freely available for cross-border investment, and not just serve as a means of payment to facilitate trade. But the war in Ukraine may have made it possible for the yuan to reach the level of the dollar and euro - even if this has not yet happened in full. And any US policy decisions that weaken the reputation and strength of American institutions - such as the recent debt hike drama that brought the government to the brink of default - will accelerate the rise of the yuan and the fall of the dollar.