In a significant shift in the landscape of global trade finance, the renminbi (RMB) has surged past the euro, marking a new chapter in international currency usage. This analysis, originating from Asia House research, delves into the macroeconomic trends and digital advancements propelling the RMB’s rise, establishing it as a dominant force in trade settlement and finance, even surpassing the euro’s long-held position.
Key Takeaways
- The adoption of the RMB in trade finance has experienced a remarkable tripling in the past three years, and this growth is accelerating. Surpassing the euro in trade settlement, the RMB is poised to further widen this lead into 2024.
- Digital innovation within China, coupled with the expansion of digital trade finance solutions, are critical catalysts for the expedited integration of the RMB.
- Despite recent economic headwinds, China’s robust demand for commodities remains a cornerstone, continuously bolstering RMB-denominated financing activities.
- Short-term fluctuations in RMB valuation are not expected to impede the long-term trajectory of RMB expansion in the realm of trade finance.
Summary
The renminbi’s (RMB) increasing share of global trade finance is anticipated to maintain its upward trajectory, despite uncertainties surrounding China’s economic growth. Prior research from Asia House pinpointed macroeconomic shifts and the emergence of digital technologies as pivotal factors driving the internationalization of the RMB, particularly within trade finance. The RMB has not just entered the global trade finance arena; it has now demonstrably exceeded the euro’s share. Currently, the RMB facilitates nearly 6 percent of global trade settlements, a significant leap from approximately 2 percent in September 2020, effectively tripling its market presence and overtaking the euro’s 5.3 percent share.
Asia House’s latest projections indicate that the RMB will not only maintain but extend its lead over the euro throughout 2024. The magnitude of this expansion will be influenced by the stability of the global economic and financial markets; however, projections suggest a potential gap exceeding 3 percentage points within the year.
China’s ongoing digital transformation and its substantial cross-border trade and investments, especially in the energy sector, are primary drivers behind the accelerated growth of the RMB in trade finance. While the RMB is not yet recognized as a conventional safe-haven asset, its role as a funding and alternative settlement currency is expanding, particularly in economies facing challenges in accessing or affording US dollar-denominated financing.
China’s expansive global financial influence is crucial in underpinning the increasing cross-border application of the RMB in trade finance. While potential RMB devaluation may occur, it is unlikely to disrupt the fundamental growth of RMB usage, supported by China’s ever-expanding trade finance and international payment infrastructure. Reduced global financial instability would likely further accelerate RMB adoption.
The Ascending Trajectory of RMB in Trade Finance: Approaching 6 Percent and Beyond
1. The Renminbi’s Growing Footprint in Trade Finance
The renminbi’s utilization in global trade continues to accelerate, even amidst growing uncertainties concerning China’s economic outlook. As highlighted in previous analyses, macroeconomic and digital inflection points continue to catalyze the RMB in trade transactions, fostering its broader internationalization within trade finance. Notably, the RMB’s share of trade finance has now surpassed that of the euro (Figure 1). Should current trends persist, projections indicate that the RMB could substantially outpace the euro into 2024, contingent on the degree of global economic and financial volatility.
Figure 1. RMB and Euro Share of Global Trade Finance
(Percentage Share)
Source: SWIFT; Asia House Research.
The surge in the RMB’s share of global trade finance since spring has been significantly supported by China’s digital expansion and its extensive cross-border trade and investment in the energy sector. While this upward trend is expected to continue, it’s important to note that the RMB’s overall share remains considerably smaller compared to the US dollar, which dominates trade finance, accounting for approximately 85 percent according to SWIFT data.
Looking ahead, we anticipate three potential scenarios for the accelerated adoption of the RMB (Figure 1). A continued increase in the RMB’s share of trade finance is expected, driven by two primary structural trends:
The synergy of increasing digitalization, the proliferation of innovative digital technologies applied to trade finance, and China’s consistent energy demand are likely to further stimulate the adoption of RMB-denominated trade finance contracts, tools, and initiatives, particularly with key trading partners. Increasingly, these partners are emerging market economies with converging geopolitical and economic interests. China’s sustained appetite for commodities will also continue to fuel the “petro-yuan” dynamic.
2. Risk Dynamics and the RMB as a Safe Haven Alternative
These structural trends underpin Asia House’s projections for the continued growth of the RMB’s trade finance share (Figure 1). However, the pace of RMB adoption and RMB-denominated payments in the coming months will partly depend on financial market and broader economic volatility. The RMB’s performance in relation to global economic shifts – represented by the “high volatility” versus “low volatility” scenarios in Figure 1 – will be crucial.
In a global economic environment marked by intermittent and sometimes acute financial market volatility, slowing growth, stretched asset valuations, and elevated debt levels, investor risk aversion is expected to remain heightened. Geopolitical uncertainties, including the Israel-Palestine conflict and the ongoing Russia-Ukraine war, will further dampen economic sentiment. Persistent risk aversion, or spikes in risk indicators like the VIX, generally favor the US dollar due to its safe-haven status.
Global economic growth is projected to decelerate in 2024, with China’s economic slowdown being particularly pronounced compared to the rest of Asia. Additionally, while the probability of a US recession, as indicated by the US interest rate market, has decreased, it remains above 50 percent. Potential spillover effects from both the US and China could further strengthen the US dollar at the expense of other currencies, including the renminbi (Figure 2).
Figure 2. Asia’s Exchange Rate Developments in Context
(Annual Percentage Changes)
Source: World Bank World Development Indicators; Author’s calculation.
3. The Expanding Role of the RMB as a Safe Haven and Funding Currency
The RMB’s nascent but growing role as both a safe haven asset and a funding currency is particularly relevant in periods characterized by heightened financial volatility.
- While the RMB is not yet a fully established safe haven currency in terms of its capacity to effectively hedge against or counteract financial market volatility, its potential in this area is evolving. It is increasingly being considered as a funding currency, facilitating investments in higher-yield emerging market currencies. In scenarios of lower risk aversion, the RMB’s utility in funding higher-yielding investments and trade within emerging economies is expected to increase.
- Furthermore, the RMB is increasingly being selectively utilized as an alternative trade settlement and reserve currency in higher-risk environments, particularly in distressed, fragile, conflict-affected, or slowing economies. This is especially true for nations that are finding it increasingly challenging to finance debts in US dollars. Argentina’s recent use of the RMB to stabilize its reserves and restructure IMF debts serves as a notable example.
- China’s economic outlook carries significant downside risks into 2024. Should its domestic debt and investment overhang mirror Japan’s past debt-deflation experience, China could face a structural growth deceleration or a significant economic paradigm shift, even considering the policy tools available to the People’s Bank of China. A downward adjustment in the RMB’s real trade-weighted value, which remains elevated, is plausible, particularly against its Asian counterparts (Figure 3). In a high-volatility domestic scenario, the adoption of the RMB in trade finance might be tempered, leading to a slower pace of acceleration.
Figure 3. Trade-Weighted Renminbi and the RMB/USD
(Annual Percentage Changes)
Source: World Bank World Development Indicators; Author’s calculation.
4. Institutional Foundations for Future RMB Growth
The RMB’s share of global trade finance is set to continue its expansion, despite anticipated economic deceleration. China’s international investment position (IIP) and its extensive global financial network, encompassing both onshore and offshore facilities, will be instrumental in this growth. While China’s IIP remains relatively low, it surpasses the global average for emerging markets, many of which hold negative positions.
A potential headwind to this trend could be further RMB depreciation. However, this is unlikely to significantly disrupt the long-term resilience and expansion of the RMB within trade finance and international payments infrastructure. Sustained trade growth in China and the ongoing advancements in its digital economy will be crucial supporting factors.
Bolstered by a growing IIP, enhanced institutional RMB payment mechanisms, and increasing cross-border investment under the Belt and Road Initiative, the momentum for cross-border RMB settlement is expected to strengthen. Chinese banks are projected to further drive this growth through continued acquisitions of local banks in emerging market economies, expanding the RMB’s global reach and accessibility.
References
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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.
[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/
[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
[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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