China Globalizing Currency But Ten Years From Passing British Pound for Third

Russia and China agreed to develop bilateral trade using the Russian ruble and the Chinese yuan.

China-Russia bilateral trade was US$24.2 billion in the first quarter of 2019, according to Chinese customs. This was up 30 percent over the first quarter of 2018. China has become Russia’s largest trade partner with about 14 percent of payments in yuan and 7-8 percent in ruble.

There are plans to reach US$200 billion in mutual trade by 2020, sign a local currencies settlement agreement later this year and extend the use of the national credit-card systems Union Pay and Mir in both countries.

In April, 2019, the yuan ranked fifth among global currencies, accounting for 1.88% of payments that went through SWIFT in April. The U.S. dollar was used for 40.76% of transactions, followed by the euro (33.16%), the U.K. pound (7.11%) and the Japanese yen (3.47%).

A Chinese clearing and settlement services system aimed at internationalizing the yuan saw its use grow about 80% in value terms last year, a Nikkei survey finds, a rising challenge to the hegemony of the U.S. dollar.

Since the People’s Bank of China began operating the Cross-border Interbank Payment System in October 2015, hundreds of banks in 89 countries and regions have participated. The system processed 26 trillion yuan ($3.77 trillion) of payments in 2018.

In May 2018, China and the Eurasian Economic Union signed a trade and economic agreement as a base to reduce dollar dominance in trade and as an important milestone in linking the Eurasian Economic union to the Belt and Road Initiative.

China is the world’s largest importer and second largest consumer of crude oil. In 2018, China launched a yuan-denominated crude oil futures contract on the Shanghai Stock Exchange – the so-called petroyuan – amid a growing willingness from Iran, Russia, Saudi Arabia and Venezuela to settle oil payments in yuan and other non-dollar currencies.

In 2019, Russia has plans to issue federal bonds denominated in yuan for the first time, with as much as US$1 billion worth of notes trading on the Moscow exchange.

In August 2015, China’s yuan was briefly the fourth most-used world payment currency by overtaking the Japanese Yen. However, it has fallen back behind the Yen. Chinese currency’s share as a total of global payments fell against the year-ago period. The yuan accounted for 1.68 percent of international payments in December 2016. The currency’s share was 2.31 percent in December 2015. A major reason why the renminbi has not gained traction among international users is that the government has instituted strong controls over its financial system.

In 2014, the US dollar was the dominant international trade currency, with a 51.9% share of the value of international currency usage in 2014. The euro was second, with a 30.5% share of the total value. The British pound is third, with a 5.4% share of the total value. In 2015, the yuan reached a record high market share of 2.79 percent in global payments for the month, compared to 1.39 percent in January 2014.

19 thoughts on “China Globalizing Currency But Ten Years From Passing British Pound for Third”

  1. Sorry, but this doesn’t help much. Benoit does some cherry picking on the data, but essentially his overall message is on target. That is, Euro is here to stay and has the potential to be a more important reserve currency if only Europe can get it’s act together. In ECB parlance this means “more Europe”, ie a true federal state, and is a well known French policy desire. They key for a Euro as a more important reserve currency (it obviously already is one for Europe) is having a very deep and EU-wide capital markets. The ECB makes this point. This is a very long way off, if ever, imho because it requires a federalization of Europe.

    The data cherry picking is obvious to the trained eye. The “snapshot” of “international loans and debt” are issuances outside home currency. Once you include issuance inside, the USD accounts for 80%+. “global payments” includes intra-EUR payments (per definition cross-border) and Europeans use SWIFT, whereas the Americans don’t (for US domestic transactions). Same issue with global trade figures. And, as pointed out before, trade is a minor component of why a currency is globally considered a safe haven.

    There is no trend of USD reducing it’s reserve status, it’s the other way. Witness the 2008/09 crises USD swap lines provided by the Fed in order for the large European banks to survive (whose balance sheets are about 50% USD, some higher). When the largest banks in a country are borrowing mostly in USD, it kinda defines “reserve”.

  2. Making,the,Renembi a global reserve currency has been a longstanding goal of China, after all, you can’t build an empire on someone else’s dime, or rather you can’t build the Belt and Road Initiative (BRI) using USD denominated loans. Already many analyst in Hong Kong are predicting a hard currency crisis. The South China morning Post recently questioned whether China’s stated $3.1 trillion in reserves was enough to cover outstanding Business loans and BRI loans. Stating, “The government’s dramatic about-face from encouraging aggressive overseas acquisitions to cracking down on risky lending and overseas transfers underscores worries over the risk that the nation could run short of enough US dollars to make the interest and principal payments on its mounting debt at a time when the current account balance is coming under pressure.”

    All this leaves China in a bit of a pickle in that they need for the Renembi to be an international reserve currency bit to do that they need transparency, full convertibility, and the ability to freely move capital in and out of China. When they partially removed capital controls in 2016 they had nearly $1 trillion leave the country in 6 months before they reimposed very stringent controls on sending capital overseas. Right now it’s a damned if you do damned if you don’t situation.

  3. I found this, which is quite interesting because it comes from a major central bank and it’s fairly recent (Feb 2019). The second chart is what we’ve been talking about in terms of what currency is used for what; it’s just a snapshot, it doesn’t convey how things are changing. However, the third chart gives us a hint about this: admittedly it is related only to FX reserves, but one can reasonably presume similar things are happening also in the other areas.

    It’s central bankers themselves who are talking about a slow shift towards a multipolar world. The entire piece is worth a read imho.

    I hope it helps.

  4. What a numbskull. But that you are a troll is obvious.
    Oh yes, Chinese companies will start asking Apple, GE, Siemens etc to pay them in Yuan. Freaking hilarious. I can just see it now. “Yes mr oil man, we need your oil desperately to keep the lights on and we insist we pay you in yuan”. Oilman – “say what? in Juan? There is no Juan here. Son, it’s greenbacks or you say nighty night.”
    The Uncle Xi gets a hissy fit: “That’s it, I’m gonna dump my dollars, sell them”.
    The federal reserve: “yes of course, we understand. We just sold your treasuries and credited your USD account. Will you be closing your account with us? If so can you please tell us where you would like to send the dollars?”

    Repeat after me – Uncle Xi is a douche.

  5. Not theory. Reality. Central bank reserves are no indicator at all. Prove it. And what is the nonsense with gold reserves? There are rounding errors, and then there are gold reserves, that round off the rounding errors.

    There is nothing “slowly changing”. Prove it. The data of where money is and who has it does not support your “theory”.

    You can diversify all you want, I don’t care. Oh, I have a theory – everyone will eventually use one currency and we will be ruled by the Bilderbergs. what a waste of time.

  6. thanks for the theory rehearsal, but I was aware that I posted the central bank reserves; I did so because those are an indicator of where the world is going (and there’s an indirect feedback loop with everything else).
    No question that the USD is still the most prominent reserve currency, but my point is that this is slowly changing – in private securities or trade flows – and the evidence is that change in central bank reserves (or even in what they’re doing with their gold reserves).

    If it can be of any comfort to you, most of my wealth is in dollar-denominated securities at the moment, but I surely would like to have more diversification in the future because:

    • less and less countries will sell oil exclusively in USD
    • more and more trade will happen in other currencies
    • the FED gotta keep the happy printer on to cover more and more reckless fiscal deficits every year

    “the beginning of every tragedy is an error in judgement”, or, if you prefer the alternative, “the fall of every hero begins with an eccess of confidence”. We all can pretend to sit comfortably for some more time, but it would be unforgivable to oneself to knowingly ignore the changes happening before our eyes.

  7. No, and no, sorry., it seems you don’t understand modern economics. Your chart are only the balances of currency accounts held by central banks (other than their home currency, of course). I.e., that 6.6tr figure for USD is what CB’s hold in USD with the Fed, half of this amount is PBOC (China). It is what China uses to receive USD from Nike when Chinese companies sell shoes to them. The remaining USD are mostly deposits the ECB, BOJ, and Saudi have with the Fed. The China deal is export-related. The FX reserves the other CBs have is monetary-policy related, like a exchange rate buffer. That’s it.

    Do not confuse the term “reserve currency” with central bank “reserves” in foreign currency. Two completely different things. A reserve currency is a “backstop”, one which is a safe haven. There is only one, it is the USD.

    The financial assets are 300T give or take. You’ll find this via SIFMA, BIS and other sources. The non-US domiciled USD securities are things like a global European bank who issues USD bonds to make USD loans, or Daimler who issues USD shares (for buyers outside the US) to fund factories etc in USD. The bulk of USD financial assets are both issued and bought by financial institutions (think the largest pension fund in the world – Norway – who buys USD stocks and bonds). Pension funds alone represent $30 trillion of assets. The financialization of the world determines the safe haven, and it’s the US.

  8. Central bank foreign exchange reserves are what moves the needle when it comes to the status of “reserve currency”.

    By the way, I have no objection in using any currency you may like for accounting purposes. As a matter of fact, for accounting and also to repay some claims, the big guys are using XDR, a synthetic currency by IMF, whose composition is:
    If I had to allocate my wealth in a more profesisonal way, I’d losely follow this currency allocation.

    Regarding that “outside” figure: I don’t know where you took it from, but even assuming that’s true, it doesn’t tell me anything about what it really is or where this is going: are those companies with USD-denominated equities listed in their own currency as well in a home market (double listing)? When those bonds come to maturity, are new bonds of equal or greater amount going to be issued in USD again? Etc… You know, private investors (a.k.a. the market) can do whatever they want, as long as they find it reasonable. For the USD to keep being used as much as it used to be in international trade, it has to be reasonable.

    I believe the scare for the trade war, sanctions, the weaponization of the SWIFT, etc… is pushing not only the usual foes (Russia, China, Iran, NK, Venezuela, etc…) but also many more countries to look out for alternatives and eventually gravity might work its way in, as it always does.

  9. It took 70 years (1875 to 1945) after the USA economy became larger than Great Britain that the US dollar eclipsed the pound in financial transactions, denominating securities, and reserve status. And WWII. And those were two countries that were relatively open financially.

    China actually managed to be less financially open now than they were 10 years ago. So I predict things will stay this way for quite a while unless China becomes much more financially open or the USA much less.

  10. Its actually quite simple. 

    China, feeling the Trump Heat, and not expecting that their previously unchallenged Preferred Nation Trading Partner status, now sees the writing on the wall. 

    Trump, reëlected, will keep the heat on the Chinese with economically oppressing tariffs until he leaves office, or until the US and CHINESE negotiators work out a MUCH MORE BALANCED trade agreement between them. Ironically, if kept-to, that same agreement would have equally stultifying economic propensity in the future, without tariffs.

    China looks at her coffers, income, outflow … and sees she remains dependent on plentiful dollars to purchase critically needed ores, raw materials and crude oil from the Middle East and Russia, Africa. Many countries are indifferent to trade oil-for-yuan, but see that they can spend the yuan back in China for lots of Chinese products; e.g. if 80% of Walmart’s shelf proucts are Made-In-China, imagine what most-any other country’s discount marts’ shelves are loaded with?

    So there IS A PLACE for yuan denominated raw materials purchases, since China has worked HARD to secure the majority of exports-of-most-everything worldwide.  

    While some poo-pooh the Yuan as a significant international deal-closing currency, truth is, it doesn’t matter: if countries are generally being encouraged to accept and respend yuan for trade with China, there will come a point in the not-distant future where most-every country will be able-and-willing to do so too.  


  11. Not really. What you show there are central bank foreign exchange reserves which are essentially uninteresting when considering the global stock of financial assets is about $300 trillion, most of which is USD. Just the amount of USD equities and bonds outstanding OUTSIDE the US amounts to about $48 trillion, or 4 times the figure you cited. IN that context, anything other than the USD, and to some extent EUR is a rounding error.

  12. yes, thanks. Merchandise trade is only important for the currencies of countries without substantial cross border capital flows. China and Russia are completely dependent on trade flows for the value of their currency, while trade is completely irrelevant to the USD. EUR is an in-between as much of EUR denominated financial assets stays in Europe.

  13. I’m glad someone else knows how the global economy actually works. The data Brian used was headline BIS data. One thing he didn’t do was actually dive into that data. For example, on the Euro-denominated trade settlement data, over half of those transactions, while denominated in Euros, are actually hedged in USD.

  14. Sorry Brian, but this article is extremely misleading, but you aren’t aware. The “most used currency” is a misnomer. Global merchandise trade (global exports of about $7 trillion) is a really, really, small part of currency use. The capital markets are completely and totally dominate when it comes to currencies, and are about 75x bigger than global merchandise. Within that, the USD represents about 80% of everything (e.g., 90% of all foreign exchange trades have a USD leg, and turns over global gdp every 2 weeks). This makes perfect sense as debt and investments are made largely in USD.

    Global trade is basically a rounding error when it comes to USD and other currency usage.
    There is no alternative to the USD. Russia’s little foray into RMB bonds is laughable when the buyers realize they can’t hedge their exposure. That Russia-China “less dependency of USD” is a joke, especially when Russia sells their gas for USD.

    Finally, there is no willingness by Saudi to settle in yuan. They are a dollarized economy, and there is nothing they can do with their yuan even if they had some.

  15. Petroyuan, and petroeuro, are actually kinda important, as so much of global finance ultimately was until recently done almost exclusively on a petrodollar basis. There were allegations the all the US expeditions into the middle east were precipitated due to moves by Iraq and Iran towards petroeuros. Upsetting the petrodollar global finance hegemony has political as well as financial ramifications.

Comments are closed.