Key Insights
- The Renminbi (RMB) has experienced a remarkable surge in trade finance, tripling its usage in the past three years and now exceeding the Euro. This trend is projected to continue into 2024.
- Digital innovation in China and the expansion of digital trade finance solutions are key catalysts for the accelerated adoption of the RMB.
- Despite China’s economic headwinds, its robust demand for commodities remains a significant factor supporting RMB-denominated financing.
- Short-term RMB weakness is not expected to impede the long-term growth of RMB usage in trade finance.
Summary
The Renminbi (RMB) is increasingly becoming a dominant force in global trade finance, with its share continuing to expand despite uncertainties surrounding China’s economic growth. Building on previous research from Asia House which identified macroeconomic shifts and digital advancements as crucial factors in the RMB’s internationalization, particularly in trade finance, recent data confirms a significant milestone: the RMB has now overtaken the euro in trade settlement. The RMB’s share of global trade finance has nearly tripled since September 2020, reaching approximately 6 percent of trade settlement and surpassing the euro’s share of 5.3 percent.
Asia House’s latest analysis indicates that the RMB is poised to maintain its lead over the euro in trade finance throughout 2024 and potentially widen the gap. The extent of this divergence will depend on the stability of the global economic and financial markets, but projections suggest the difference could exceed 3 percentage points within a year.
China’s ongoing digital transformation, coupled with its expanding cross-border trade and investments in sectors like energy, are primary drivers fueling the RMB’s growing prominence in trade finance. While the RMB is not yet recognized as a fully established safe-haven asset, its role as a funding and alternative settlement currency is gaining traction, particularly in economies facing challenges in accessing or affording US dollar financing.
China’s expanding global financial influence is crucial in underpinning the increasing cross-border use of the RMB in trade finance. While RMB value fluctuations may occur, they are unlikely to disrupt the long-term upward trajectory of RMB usage, supported by China’s advanced trade finance and international payments infrastructure. Reduced global financial volatility, however, could further accelerate the RMB’s adoption.
The Ascendancy of the RMB in Trade Finance: Exceeding the Euro
- The Rising Tide of Renminbi Usage
The Renminbi’s (RMB) momentum in trade finance continues to build, demonstrating resilience amidst uncertainties in China’s economic outlook. As previous analysis has highlighted, macroeconomic and digital tipping points are acting as catalysts, propelling the RMB in trade transactions and fostering its internationalization within trade finance. A key development is the RMB’s share in trade finance now outstripping that of the euro, as illustrated in Figure 1. Current trends suggest that the RMB is on track to significantly surpass the euro’s share in 2024, with the magnitude of this shift contingent on global economic and financial market volatility.
Figure 1. RMB and euro share of global trade finance
(Percentage share)
Source: SWIFT; Asia House Research.
China’s digital expansion and its growing cross-border trade and investment in energy resources have been instrumental in accelerating the RMB’s share in global trade finance since the spring. This trend is expected to persist, although it’s important to note that the RMB’s overall share remains considerably smaller compared to the US dollar, which dominates trade finance with approximately 85 percent, according to SWIFT data.
Looking ahead, we anticipate three potential scenarios for the accelerated use of the RMB, as depicted in Figure 1. The RMB’s share in trade finance is expected to continue its upward trajectory, driven by two key structural trends:
The increasing convergence of digitalization, the proliferation of innovative digital technologies in trade finance, and China’s robust energy demand are likely to further stimulate the growth of RMB-denominated trade finance contracts, tools, and initiatives, particularly with China’s key trading partners. Increasingly, these partners are emerging market economies that share similar geopolitical and economic interests. Furthermore, China’s sustained demand for commodities is expected to bolster the “petro-yuan” phenomenon.
- Risk Aversion and the RMB’s Safe Haven Potential
These underlying structural trends support Asia House’s projections for the increasing share of RMB in trade finance, as shown in Figure 1. The pace at which RMB usage and RMB-denominated payments accelerate in the coming months will partly depend on financial market and economic volatility. The RMB’s performance relative to global economic developments, as represented by the “high volatility” versus “low volatility” scenarios in Figure 1, will be crucial.
In the current global economic landscape characterized by intermittent and sometimes severe financial market volatility, slowing economic growth, stretched asset valuations, and high levels of debt, investor risk aversion is expected to remain elevated in the near term. Geopolitical risks stemming from conflicts such as the Israel-Palestine situation and the Russia-Ukraine war are also contributing to cautious economic sentiment. Persistent investor risk aversion or further spikes in risk indicators like the VIX are typically favorable for the US dollar due to its safe-haven status.
Global economic growth is anticipated to slow down in 2024, with China’s economic deceleration expected to be particularly noticeable 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 also occur. Based on these factors, the US dollar is likely to maintain strength against various currencies, including the renminbi, as illustrated in Figure 2.
Figure 2. Asia’s exchange rate developments in context
(Annual percentage changes)
Source: World Bank World Development Indicators; Author’s calculation.
- RMB’s Expanding Role as a Safe Haven Asset and Funding Currency
The RMB’s gradually increasing role as both a safe haven asset and a funding currency is particularly relevant during periods of heightened financial volatility.
- While the RMB is not yet a fully established safe haven currency in terms of its capacity to hedge or counter financial market volatility, it is evolving in this direction. Furthermore, the RMB is increasingly being utilized as a funding currency to facilitate investments in higher-yielding emerging market currencies. In scenarios of lower risk aversion, the use of RMB to fund higher-yielding investments and trade in emerging economies is expected to increase.
- Moreover, the RMB is being selectively adopted as an alternative trade settlement and reserve currency in higher-risk environments, particularly in distressed, fragile, conflict-affected, or slowing economies that are finding it increasingly challenging to finance their debts in US dollars. Argentina’s use of the RMB to stabilize its reserves and restructure IMF debts serves as a prominent example.
- China’s economic outlook for 2024 carries considerable downside risks. If China’s domestic debt and investment overhang were to mirror Japan’s past experience with debt-deflation, it could potentially face a structural growth slowdown or a significant economic paradigm shift, despite the policy flexibility available to the People’s Bank of China. A downward adjustment in the RMB’s real trade-weighted value, which remains elevated, is plausible, especially relative to its Asian counterparts, as shown in Figure 3. In a scenario of higher domestic volatility, the usage of the RMB in trade finance could 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.
- Institutional Factors Bolstering the RMB’s Future
The RMB’s share of global trade finance is projected to continue its expansion, even considering the possibility of an economic slowdown in China. China’s international investment position (IIP) and its global financial footprint, encompassing both onshore and offshore facilities, will be critical factors. While China’s IIP is still relatively low, it surpasses the global average for emerging markets, many of which hold negative positions.
A potential headwind to this growing trend could be further RMB weakness. However, this is unlikely to derail the long-term resilience of the RMB and its growth in trade finance and international payments infrastructure. China’s trade growth and the continued advancement of innovations within its digital economy will remain essential drivers.
Supported by a growing IIP, expanding institutional RMB payment facilities, and cross-border investment initiatives such as the Belt and Road Initiative, the momentum for cross-border RMB settlement is expected to strengthen further. Chinese banks are poised to continue fueling this increase through the ongoing acquisition of local banks in emerging market economies.
References
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