The global financial landscape is undergoing a significant transformation, with the Chinese Renminbi (RMB) rapidly increasing its footprint in international trade finance. Recent research from Asia House reveals a compelling trend: the RMB has not only tripled its usage in trade finance over the past three years but has also surpassed the Euro, becoming a dominant force in trade settlement. This shift signals a major realignment in global currency dynamics, prompting a closer examination of the factors driving the RMB’s ascent and its implications for the future of international trade.
This analysis delves into the macroeconomic and digital factors propelling the RMB’s growth, exploring why it has overtaken the Euro in trade finance and assessing its trajectory for 2024 and beyond. We will examine the role of China’s digital innovation, its resilient commodity demand, and the broader geopolitical context in fostering the RMB’s internationalization. Despite economic headwinds and currency fluctuations, the underlying forces driving RMB adoption in trade finance appear robust, suggesting a sustained shift in the global financial order.
The Ascendancy of the RMB in Trade Finance
The Renminbi’s growing prominence in trade finance is undeniable. Data indicates a near tripling of RMB usage in trade settlement since September 2020, now accounting for nearly 6 percent of the global share. This milestone marks a significant achievement, as the RMB has definitively overtaken the Euro, which holds a 5.3 percent share. This upward trajectory is not merely a fleeting trend but rather a reflection of deeper structural shifts in the global economy.
Source: SWIFT; Asia House Research.
Asia House’s latest assessment projects that the RMB will not only maintain its lead over the Euro but will likely widen the gap throughout 2024. The extent of this expansion will be influenced by global economic stability and financial market volatility. However, even under varying economic conditions, the RMB’s share is predicted to significantly exceed that of the Euro, potentially by over 3 percentage points within the next year.
Several factors are converging to fuel this acceleration. China’s ongoing digital expansion, coupled with its increasing cross-border trade and investment in energy, are pivotal drivers. While the RMB is not yet considered a fully-fledged safe-haven asset, its role as a funding currency and an alternative settlement currency is gaining traction, particularly in economies seeking alternatives to US dollar-denominated financing.
China’s expanding global financial influence is crucial in supporting the international use of the RMB in trade finance. While short-term RMB weakness may occur, it is unlikely to derail the long-term growth of RMB usage, underpinned by China’s robust trade finance and international payments infrastructure. Reduced global financial volatility would further accelerate this adoption, solidifying the RMB’s position in the global financial system.
Drivers Behind the RMB’s Rise in Trade Finance
The sustained growth of the RMB in trade finance is propelled by a confluence of macroeconomic and digital advancements. These “tipping points,” as highlighted in previous Asia House research, are not only facilitating RMB usage in trade transactions but are also fostering its broader internationalization within trade finance mechanisms.
Digital Innovation and Trade Finance
China’s digital revolution is a cornerstone of the RMB’s ascent. The nation’s rapid adoption of digital technologies in finance, particularly in trade finance, is creating new efficiencies and opportunities for RMB usage. Innovative digital trade finance products are streamlining cross-border transactions, making the RMB a more attractive and practical option for businesses engaged in international trade.
The expansion of digital platforms and solutions tailored for trade finance is particularly impactful. These include blockchain-based systems that enhance transparency and security in trade transactions, and digital payment platforms that simplify cross-border payments in RMB. These advancements reduce transaction costs and processing times, making RMB-denominated trade more efficient and accessible.
China’s Commodity Demand and the Petro-Yuan
China’s insatiable demand for commodities plays a significant role in bolstering RMB-denominated trade finance. As the world’s largest consumer of raw materials, China’s commodity imports are predominantly financed in RMB, particularly in the energy sector. This has led to the emergence of the “petro-yuan,” where oil and gas transactions are increasingly settled in RMB.
This trend is further reinforced by China’s strategic partnerships with commodity-rich nations, many of which are keen to diversify away from the US dollar and embrace the RMB for trade settlements. This shift is not only driven by economic pragmatism but also by geopolitical considerations, as countries seek to reduce their reliance on the US dollar-dominated financial system.
Geopolitical Alignment and Economic Interests
The increasing use of the RMB in trade finance is also intertwined with geopolitical dynamics. China’s growing economic influence and its Belt and Road Initiative are fostering closer trade ties with emerging market economies. Many of these nations share similar geopolitical and economic interests with China, making RMB-denominated trade a natural progression in their bilateral relationships.
Moreover, as some economies face challenges in accessing or affording US dollar financing, the RMB emerges as a viable alternative. For countries facing economic distress or geopolitical tensions with the West, settling trade in RMB offers a degree of insulation from dollar-centric financial pressures. This is particularly relevant in scenarios where nations seek to reduce their dependence on the US dollar and diversify their currency reserves.
RMB as a Safe Haven and Funding Currency
While the US dollar traditionally holds the mantle of a safe-haven currency, the RMB is gradually carving out its own niche, particularly in specific contexts. In times of global economic uncertainty and financial market volatility, the RMB’s role as both a safe haven and a funding currency is becoming increasingly relevant.
Safe Haven Status in Specific Contexts
Although the RMB is not yet a fully established safe-haven currency in the same vein as the US dollar or the Swiss Franc, it exhibits safe-haven characteristics in certain scenarios. During periods of regional or global economic stress, the RMB can offer relative stability, particularly for economies closely linked to China or those seeking alternatives to traditional safe-haven currencies.
This perceived safe-haven status is partly attributed to China’s large and relatively stable economy, as well as the Chinese government’s control over its currency. In times of crisis, investors may view the RMB as a less volatile option compared to other emerging market currencies, or even some developed market currencies facing specific economic headwinds.
RMB as a Funding Currency
The RMB’s role as a funding currency is also gaining prominence. In a low-interest-rate environment, and with China’s relatively stable currency, the RMB can be an attractive funding source for investments in higher-yielding emerging markets. Businesses and investors can borrow RMB at potentially lower costs and deploy these funds in markets offering better returns.
Furthermore, the RMB is increasingly used to finance trade in emerging economies. Its growing acceptance as a settlement currency, coupled with China’s expanding financial infrastructure, makes the RMB a practical and cost-effective funding option for trade transactions, particularly along the Belt and Road routes and within China’s sphere of economic influence.
Source: World Bank World Development Indicators; Author’s calculation.
Institutional Factors Bolstering RMB Growth
Looking ahead, institutional factors are poised to further strengthen the RMB’s position in global trade finance. China’s expanding international investment position (IIP) and its growing global financial footprint are crucial in underpinning the cross-border usage of the RMB.
China’s Expanding Financial Infrastructure
China is actively developing and expanding its financial infrastructure to support the internationalization of the RMB. The Cross-Border Interbank Payment System (CIPS), China’s alternative to SWIFT, is playing a vital role in facilitating RMB-denominated cross-border payments. CIPS offers a secure and efficient platform for international RMB transactions, reducing reliance on the SWIFT system and enhancing the RMB’s global reach.
Furthermore, Chinese banks are expanding their international presence, particularly in emerging markets, through acquisitions and the establishment of branches and subsidiaries. This expansion provides greater access to RMB-denominated financial services and facilitates RMB trade finance in these regions.
Belt and Road Initiative and RMB Internationalization
The Belt and Road Initiative (BRI) is a significant catalyst for RMB internationalization. As China invests heavily in infrastructure projects across Asia, Africa, and Latin America, RMB financing and settlement are becoming increasingly prevalent in BRI-related trade and investment activities.
The BRI promotes RMB usage by encouraging partner countries to use the RMB for project financing, trade settlements, and reserve accumulation. This creates a network effect, where increased RMB usage within the BRI framework further solidifies its position as a global trade and investment currency.
Conclusion: The RMB’s Continued Ascent
The evidence strongly suggests that the RMB’s share of global trade finance will continue to expand, even in the face of potential economic slowdowns. China’s strategic focus on digital innovation, its robust commodity demand, and its expanding global financial infrastructure are powerful drivers that will sustain the RMB’s upward trajectory.
Source: World Bank World Development Indicators; Author’s calculation.
While short-term fluctuations and global economic volatility may influence the pace of growth, the long-term trend is clear: the RMB is becoming an increasingly important currency in global trade finance, and its surpassing of the Euro is a testament to this profound shift in the international monetary system. As China’s economic influence continues to expand and its financial infrastructure matures, the RMB is poised to play an even more prominent role in shaping the future of global trade and finance.
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[1]September 2023 SWIFT data reveal a 5.8 per cent share. See: https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker/rmb-tracker-document-centre?page=0.
[2]https://asiahouse.org/research_posts/the-renminbis-rise-and-its-accelerated-use-in-global-trade-finance/
[3]Internationalisation defined here along the framework of Chinn and Frankel (2005).
[4] See the SWIFT RMB Tracker for October: https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker/rmb-tracker-document-centre
[5] This excludes intra-euro-area payments.
[6]https://www.business.hsbc.com.cn/en-gb/campaigns/smarter-banking/global-trade-blockchain
[7]https://www.rmb.co.za/page/supply-chain-finance-for-firstrand-suppliers
[8]https://www.asian-risks.com/2021/12/22/credit-insurance-market-in-china-2/
[9]https://apnews.com/article/yuan-bolivia-trade-argentina-brazil-dollar-696bfb7c5ab68d4f0a87a7f6557678f0
[10]The VIX index is an indicator of expected market volatility. See: https://www.cboe.com/tradable_products/vix/
[11]At time of writing, this estimate is based on the US 10YR-3YR Treasury interest rate spread. https://www.newyorkfed.org/medialibrary/media/research/capital_markets/Prob_Rec.pdf
[12] See: https://www.whitehouse.gov/briefing-room/press-briefings/2023/09/08/press-gaggle-by-secretary-of-the-treasury-janet-yellen-ahead-of-the-g20-summit-in-india-new-delhi-india/
[13]See Poenisch (2021).
[14]This data has seen continued resilience. See: https://www.safe.gov.cn/en/2023/1020/2138.html.
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