Slow going for China's ambitions to make the yuan a global currency, survey finds

Karen Yeung

China's effort to promote the yuan as a global currency has made only marginal progress in the last three years, according to an international survey conducted by the Bank for International Settlements (BIS).

The yuan kept its ranking as the world's eighth most-traded currency, with a daily average turnover of US$284 billion, up from US$202 billion three years ago, according to the BIS' triennial survey of foreign exchange, indicating that it is evolving into an international currency very slowly.

The yuan's share of all currency trades rose to 4.3 per cent from the 4.0 per cent in the 2016 snapshot, the survey showed.

By comparison, the US dollar retained its place as the world's dominant currency, with a turnover of US$5.82 trillion. The US dollar was on one side of 88 per cent of all currency trades, little changed from three years ago. It was also the second currency in 95 per cent of all yuan-denominated transactions.

The euro was the second most-traded currency, involved in 32 per cent of all transactions, while the Japanese yen kept its third place with a share of 17 per cent.

Analysts said the fact that yuan-based transactions had changed so little over the last three years indicated that the Chinese currency would not overtake the US dollar any time soon, with the data showing that the greenback remained the currency of choice for invoicing trade transactions by most countries.

With strict capital controls in place, China is gradually opening its domestic markets up to foreigners. Progress in having international central banks include yuan-denominated assets in their foreign exchange reserves was slow, traders and asset managers said.

"No matter how much money inflows you are encouraging, the currency is still not very free if you do not allow outflows," said Eugenia Fabon Victorino, Skandinaviska Enskilda Banken's head of Asia strategy. "It takes much more than opening the capital account to make the yuan an invoicing currency."

The Basel-based international financial institution " which represents major central banks and sets minimum capital rules for banks " carried out the survey in April, collecting data from nearly 1,300 banks and other dealers in 53 jurisdictions.

Daily average trading volume in global foreign exchange markets reached US$6.6 trillion per day in April 2019, up from US$5.1 trillion three years earlier, the BIS said.

In terms of foreign currency sales desk activity, mainland China recorded a significant rise in trading to US$136 billion in 2019, an 87 per cent increase since 2016, the BIS said. Mainland China thus climbed to the eighth-largest foreign exchange trading centre, up from 13th in the last survey.

The five largest financial centres remained, in order, Britain, the United States, Hong Kong, Singapore and Japan, which together made way for 79 per cent of all foreign exchange trades, it added.

In its latest steps to open up its financial markets to attract foreign investment and internationalise the yuan, China last week scrapped the quota limits for foreign investors under the qualified foreign institutional investor (QFII) scheme, and the renminbi qualified foreign institutional investor (RQFII) programme.

But the lifting of the QFII limit was seen as entirely symbolic given that only about a third of its US$300 billion quota was being used.

"It is inconceivable to see that companies would switch their invoicing currency into a currency that is not fully floating. You have to have a really open capital account, which we are far from right now," Victorino said.

China is banking on up to US$1 trillion of new investment that will be generated when a number of major global investment firms include yuan-denominated bonds and equities in their indices. Inclusion would automatically generate trades by foreign investors, since the rules of many investment funds require them to hold stocks and bonds featured in particular indices.

Ken Cheung Kin-tai, chief Asian currency strategist at Mizuho Bank, said the biggest concerns holding investors from making greater use of the yuan were China's slowing economic growth, increasing production costs and depreciation in the yuan's exchange rate.

Mainland China climbs to the eighth largest foreign exchange trading centre, but London remains the largest. Photo: AFP alt=Mainland China climbs to the eighth largest foreign exchange trading centre, but London remains the largest. Photo: AFP

The protracted and escalating uncertainty about the mainland economy caused by the US-China trade war meant it could be a problem to put money into China if the US were to suddenly decide to attack China's financial markets.

"China's story has changed in the last five to six years. It used to be about investors searching for growth opportunities and yuan appreciation," Cheung said. "China now needs to attract inflows to compensate for the loss of funding as foreigners consider relocating to other countries."

The yuan rebounded sharply on Monday because of easing trade war concerns and fading expectations that China would let its currency decline to counter US trade tariffs.

After US President Donald Trump last week announced the postponement of a tariff rise scheduled for October 1 until October 15, China said it would temporarily lift tariffs on US agricultural products such as soybeans and pork, while expressing its support for Chinese firms' soybeans and pork.

The "goodwill gestures" come as both countries prepare for trade talks in October, with Trump saying the US would consider an "interim" trade deal that did not address all of Washington's demands.

Despite the prospect of an easing of trade tensions, Keith Wade, chief economist and strategist at Schroders, said an extended period of global economic weakness was still expected amid questions about the willingness of firms and households to make significant spending decisions.

Chinese consumers are in no mood to lead during a period of global economic weakness. Photo: Xinhua alt=Chinese consumers are in no mood to lead during a period of global economic weakness. Photo: Xinhua

Rather than expecting a boost to global growth if a trade deal between the US and China is struck at the end of the year, investment plans are likely to be further delayed or cancelled, particularly now that tariffs are more likely to be permanent rather than temporary.

"The Chinese and wider Asian supply chains will be affected. It has been noticeable that US exports to China have fallen faster in value than imports from China. China's planned economy has reacted faster than the market-driven US," Wade said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.