Recent shifts in the global financial landscape indicate a significant development: the Renminbi (RMB), also known as the Chinese Yuan, has overtaken the euro in trade finance. This transition, detailed in recent Asia House research, highlights the increasing influence of the RMB in international trade and finance, signaling a potential reshaping of currency dominance. This article delves into the factors driving this change, analyzing the implications of the euro losing ground to the RMB in global trade.
The rise of the RMB in trade finance has been remarkable, tripling its usage in the last three years alone. This growth has propelled the RMB to surpass the euro in trade settlement, a trend projected to continue into 2024. While the US dollar remains the dominant currency in trade finance, the ascent of the RMB and its surpassing of the euro signifies a notable shift in the global economic order. This change is not merely a fluctuation; it reflects deeper macroeconomic trends and the impact of China’s digital innovation on global finance.
China’s digital advancements are a cornerstone of this RMB expansion. The country’s rapid adoption and innovation in digital trade finance products have provided significant tailwinds for RMB usage. These digital solutions streamline transactions, reduce costs, and enhance efficiency, making RMB-based trade finance increasingly attractive, particularly for businesses operating within and trading with China. This digital infrastructure advantage is a key factor in understanding how the RMB has gained ground against established currencies like the euro.
Despite facing economic headwinds and a global slowdown, China’s robust demand for commodities remains a critical factor supporting RMB-denominated financing. China’s vast import needs, particularly in energy and raw materials, are increasingly settled in RMB. This trend is further fueled by China’s strategic partnerships and its Belt and Road Initiative, which promotes RMB usage in trade and investment across Asia, Africa, and Latin America. The resilience of China’s commodity demand, even amidst economic uncertainties, provides a solid foundation for the continued expansion of RMB in trade finance, further impacting the euro’s position.
Concerns about RMB weakness and volatility might seem to pose a threat to its growing influence. However, current analysis suggests that these factors are unlikely to derail the long-term trajectory of RMB expansion in trade finance. China’s expanding trade finance infrastructure and its increasing footprint in international payments are robust enough to weather currency fluctuations. While significant global financial instability could moderate the pace of RMB adoption, the underlying structural trends favor its continued growth, solidifying its position relative to the euro and other currencies in the trade finance landscape.
The initial momentum for the RMB’s rise in trade finance was identified in previous Asia House research, which pointed to macroeconomic and digital tipping points as key catalysts. These tipping points continue to exert their influence, driving the RMB’s internationalization, especially within trade finance. The data clearly indicates that the RMB’s share has not just incrementally increased; it has decisively overtaken the euro, marking a significant milestone in global finance. If current trends persist, projections indicate that the RMB could substantially exceed the euro’s share by 2024, possibly by a margin of over 3 percentage points. This widening gap underscores the accelerating shift in currency usage in international trade.
Examining the drivers behind this acceleration reveals the critical roles of China’s ongoing digital expansion and its cross-border trade and investment in the energy sector. These factors have been particularly influential since the spring, propelling the RMB’s share in global trade finance upwards. While the US dollar still commands the vast majority of trade finance transactions, the RMB’s gains are undeniable and represent a meaningful challenge to the established currency hierarchy, where the euro has historically held a strong position.
Looking ahead, several scenarios could unfold regarding the pace of RMB adoption. However, the underlying structural trends strongly suggest a continued increase in the RMB’s share of trade finance. The combination of increasing digitalization, the innovative application of digital technologies to trade finance, and China’s consistent energy demand are powerful forces propelling the RMB. These factors are especially salient in China’s trade relationships with emerging market economies that share similar geopolitical and economic interests. Furthermore, China’s sustained appetite for commodities is invigorating the “petro-yuan,” where oil and other commodity trades are increasingly settled in RMB. This trend further solidifies the RMB’s role in global trade and finance, moving it further beyond the euro.
Investor risk aversion and the search for safe-haven assets also play a role in the evolving currency landscape. In times of global economic uncertainty and financial market volatility, the US dollar typically benefits from its safe-haven status. However, the RMB is gradually developing its credentials in this area as well. While not yet a fully established safe-haven currency, the RMB’s role as a funding currency is growing, particularly for investments in higher-yielding emerging market currencies. In situations of lower risk aversion, the RMB becomes increasingly attractive for funding higher-yielding investments and facilitating trade in emerging economies.
Moreover, in economically stressed or politically sensitive situations, the RMB is being selectively used as an alternative trade settlement and reserve currency. Countries facing difficulties in accessing or affording US dollar financing are increasingly turning to the RMB. Argentina’s use of the RMB to stabilize its reserves and manage IMF debt is a prime example of this trend. This pragmatic adoption of the RMB in challenging economic circumstances further underscores its growing international relevance, even at the euro’s expense.
Despite China’s economic outlook facing potential downside risks in 2024, the institutional factors supporting the RMB’s growth in trade finance remain robust. China’s expanding international investment position and its global financial footprint, facilitated by both onshore and offshore facilities, are crucial in underpinning the cross-border usage of the RMB. While further RMB weakness could present a temporary headwind, it is unlikely to disrupt the long-term resilience of RMB adoption in trade finance. Indeed, a more stable global financial environment would likely accelerate RMB usage even further.
In conclusion, the RMB’s ascent in global trade finance and its surpassing of the euro is a significant development with lasting implications. Driven by digital innovation, strategic trade relationships, and robust commodity demand, the RMB is poised to continue its expansion in the global financial system. While the US dollar remains dominant, the RMB’s growing influence and its displacement of the euro in trade finance mark a clear shift in the global currency landscape, signaling a move towards a more multi-polar financial world. For businesses engaged in international trade, understanding and adapting to this evolving currency dynamic, particularly the increasing role of the RMB, will be crucial in the years to come.
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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.
