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October 7, 2015

Chinese Yuan Kills The Euro Before Dollar

The rise of the Chinese yuan as an international currency is not only unstoppable but is advancing in leaps and bounds, according to SWIFT. It comes at the expense of other currencies, though it’s not triggering the long-awaited “death of the dollar.” On the contrary. Yet the euro has stumbled into the line of fire.

SWIFT is in a position to know. The member-owned organization, based in Belgium, provides among other things a network that enables financial institutions around the globe to send and receive information about financial transactions in a standardized environment. It also cooperates with various intelligence and law enforcement agencies around the world, including the US Treasury, the CIA, and others. The NSA is likely to get what it wants without asking.

In its latest RMB Tracker, SWIFT is relentlessly effusive about the rise of the yuan. In August, global payments in renminbi rose once again, achieving another milestone: it edged out the yen to become the fourth largest payments currency with a share of, well, 2.8% of global payments – “reflecting RMB’s huge potential and staggering momentum as a major currency,” the report gushes.

That’s not exactly a lot, compared to China’s economic power in the global markets. When China sneezes, as it just did, the world catches pneumonia. But it’s a big leap forward: In August 2012, the yuan was in 12th position, with a minuscule share of 0.8%.

In the Asia-Pacific region, the yuan is already the most actively used currency for intra-regional payments with China and Hong Kong, having edged out the yen this year.

Becoming a major global currency is one of the preconditions for becoming a reserve currency held by central banks as part of their foreign exchange reserves baskets. But the yuan isn’t in those baskets yet.

In Q1 2015, the composition of official foreign exchange reserves put the dollar at 64.1%, up from its recent low of 61% in 2013, but down from 71% the 1990s before the euro showed up. The euro dropped to 20.7% in Q1, down from its peak in 2009 of 27.6%. It was supposed to reach parity with the dollar. But the debt crisis exposed what it was made of, and the world got cold feet. Meanwhile, the yen rose to 4.2% of official foreign exchange reserves, the highest since 2002. 

To get into these reserve baskets, the yuan must grow into one of the largest payments currencies. And by edging out the yen, it proves that it has arrived.

But the yuan’s advance as a payments currency didn’t come out of the dollar’s hide. On the contrary. In August, the dollar’s share of global payments rose to 44.8%, from 43.6% in July, and from 38.8% in January 2014.

It came out of the euro’s hide: its share fell to 27.2% in August from 28.5% in July, from 33.5% in January 2014, and from 40.2% in January 2013.

The British pound also keeps losing traction, slipping to 8.5% in August, from 8.7% in July, and from 9.4% in January 2014. It’s still light years ahead of the next in line, the yuan’s 2.79% share and the yen’s 2.76% share.

Much of the action remains in Hong Kong, the world’s largest off-shore RMB center, processing 70.4% of all RMB payments. But the internationalization is progressing. China is going around the world appointing Official RMB Clearing Banks in the financial centers of Asia and Europe, Africa (Johannesburg, since July 2015), Australia, Chile, and Canada (Toronto, November 2014). And the major country that doesn’t have one?

The US.

But there are banks in the US that process RMB payments. They’re just not Official RMB Clearing Banks. For example, last November, China’s Industrial and Commercial Bank inked a deal with the increasingly impatient Los Angeles city government to set up an offshore renminbi center; for better or worse, China and California are joined at the hip.

In total, 1,700 banks in more than 100 countries used the RMB for payments. Of them, 1,134 banks – nearly half of them in Asia – used it for payments with China and Hong Kong; and another 600 banks used it for payments with no leg of the transaction in Hong Kong or China!

In terms of transactions sent and received by value, excluding China and Hong Kong, the UK reigns with a share of 53.1%. Is it the UK’s trading prowess, gigantic market for Chinese merchandise, or unspeakably large exports to China? Nope. It’s the City of London, center for global foreign exchange trading and rigging.

The US, China’s largest market, is in second place, with an 11.9% share. Tiny Singapore is in third place with a 7.7% share, testament to its role as a financial center in Asia. France and Japan follow with a share of 6.8% and 3.5% respectively.

The yuan is also making headway in the global issuance of Letters of Credit sent and received by value with the rest of the world, rising to a year-to-date share of 9.1%. But wait… the dollar has a share of 80.1%. All the other currencies combined, including the euro, tussle over the remaining 10.8%. They barely matter.

This may be a harbinger: The yuan won’t dent the “dollar hegemony” for a while. But it will become one of top three payments currencies and reserve currencies. Its gains come out of the hide of other currencies, particularly the euro that has spent the last seven years squandering the global confidence its designers had labored to inflate over the prior years, and whose importance on the global scene continues to spiral down.

Courtesy Wolf Richter www.wolfstreet.com

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