IMPORTANT POINTS:
- For the first time in history, the Chinese yuan has surpassed the dollar in cross-border payments from China.
- Rise in Renminbi Trade: This rise has been driven mainly by foreign investors trading in renminbi assets.
- The rise of the yuan in Hong Kong: Yuan-based trading is on the rise in Hong Kong.
New data from Goldman Sachs indicates that, for the first time in history, the Chinese yuan has outperformed the US dollar in cross-border payments from China.
According to the bank, the yuan’s share in cross-border settlements surpassed the dollar and reached a record high in March, based on data from the State Administration of Foreign Exchange of China (SAFE).
The bank attributes this significant increase mainly to trading in renminbi assets by foreign investors.
Goldman Sachs says that China has gained market share and made significant progress in its role as a medium of exchange in global markets. However, the yuan still doesn’t really compete with the dollar in many ways.
“Although China is becoming increasingly important in global goods, services and financial markets, the world’s second largest economy still has capital controls and the renminbi is not fully exchangeable. This could limit your progress in terms of ‘store of value’ and ‘unit of account’. The US dollar remains the dominant currency in international payments, at 43% in May, according to SWIFT. 32% of international payments were made in euros, 7% in sterling and 3.2% in Japanese yen.
The bank’s study suggests that payments related to portfolio investments, such as China’s domestic stock and bond market, have fueled the use of the yuan.
Yuan-based trading is starting to pick up in Hong Kong, which the bank views as an “offshore hub for the renminbi.”
“When it comes to store-of-value, China’s currency is still little used. In international bond markets, renminbi-denominated debt securities accounted for only about 0.7%, according to Bank for International Settlements data, compared with 0.4% 10 years ago. China’s currency-denominated reserves accounted for about 3% of global reserves, up from 1% in 2016 but still low in absolute levels.
He also added:
At the same time, in Hong Kong, the offshore center for the renminbi, there is a wide range of renminbi-denominated assets available to global investors. These include bonds, mutual funds, commodity-linked products, ETFs, real estate investment trusts, stocks, and insurance products.
