Chinese Yuan Becomes Second Most Used Currency in Trade

by on December 4, 2013 2:04 am GMT

According to the Society for Worldwide Interbank Financial Telecommunication, the Chinese yuan has overtaken the euro as the second most used currency in global trade finance, behind the US dollar. Australian, which makes regional sense, and Germany were the nations that used the yuan the most.

In 2012, the Chinese yuan had the forth-largest share of global trade at 1.89 percent with the euro in second place at 7.87 percent of trade. This year, the yuan has greatly increased to 8.66 percent in October. The euro declined to 6.64 percent in 2013.

Cynthia Wong, head of emerging-market trading at Societe Generale, 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.” This year, the eurozone and China have made cross-currency trades deals sidestepping the dollar all together.

The US dollar still holds a massive 81.08 percent of all global trade market, but it has declined over three percent over the last year. This coincides with China’s promise to make the yuan a leading global currency in both trade and investment. The Chinese state planners are looking to loosen the tight restrictions on the yuan, which was not as easily exchangeable off Mainland China.

The People’s Bank of China (PBOC) Governor Yi Gang said that it’s not in the interest of China to continuously build its large foreign-exchange reserves that has reached $3.66 trillion as of September. Trading the yuan outside of China is in the works as agreements this quarter were announced to begin trading the yuan between the Sterling and Singaporean dollar. China approved 80 billion yuan quota allowing London investors to buy onshore assets.

According to data provided by Bloomberg, the yuan has been the most successful Asian currency against the dollar, appreciating by 2.3 percent. Hong Kong deposits in yuan have increased to 782 billion yuan ($128 billion) since April 2011. “I’m not surprised as cross-border trades between China and Hong Kong have been quite dominantly denominated in yuan,” said Raymond Yeung, a Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd.

However, there are still limits on the yuan as China limits daily moves in the currency by one percent in either direction, and this was increased from .3 percent in May 2007.

The renminbi has made great strides, and China is going forward this its plans to increase the availability of its currency. As direct trade pacts are made with China, it is likely the dollar’s large hold over international trade will deteriorate over the next decade.