China’s Yuan Jumps Worlds 5th Most Traded Currency

The Bank for International Settlements (BIS) reports the Chinese yuan has surpassed the Australian, Canadian, and Swiss currencies to become the world’s 5th most traded currency.

The Chinese yuan was involved in 7% of all trades in 2022, up from 4% three years ago, according to the Basel-based BIS’s triennial Central Bank Survey report released on Thursday. Over the period, total daily trades increased 14% to $7.5 trillion.

The US dollar maintained its decade-long dominance as the most transacted currency in the world, accounting for one side of 88% of all transactions. The euro, yen, and pound all remained in the top four.

As China opens its financial markets, the yuan becomes a more important global currency. This is evident in an increase in the Yuan cross-border settlements and a bigger proportion of yuan in global foreign-exchange reserves.

The BIS gathered information from over 1,200 banks and dealers in 52 jurisdictions. This year, Russia was excluded, accounting for less than 1% of the world total, and Dubai was included for the first time.

The survey also revealed that the UK’s dominance in global currency trading is eroding, allowing the US, Singapore, and other European financial centres to gain market share.

London’s global market share fell to 38% in 2019 from 43% in 2018. According to the survey, the United States ranks second at 19%, up from 17% earlier.

London is still the world’s currency center

Since the 1980s, London has been the world’s currency centre, with its significance expanding in tandem with the City’s prominence in global banking, thanks partly to its placement between Asian and US time zones.

However, after the UK’s vote to leave the European Union in 2016, banks have relocated trading floors to Paris and Frankfurt.

Germany and France have witnessed volume increases, with the former accounting for 1.9% of total daily commerce and the latter accounting for 2.2%. This process may speed up if EU regulators pressure lenders to increase the workforce within the EU.

Singapore, whose officials pushed to capture a larger portion of the market in 2019 by granting incentives and creating infrastructure, has seen its share increase from 7.7% to 9.4%. Hong Kong and Japan saw 7% and 4% declines in activity, respectively.

As Xi Jinping and Vladimir Putin prepare to meet at the APEC Summit in Bangkok, Thailand, one area where deeper economic relations are already seen is in currency.

Yuan value for Russia

The Chinese yuan is proving to be a valuable release valve for Russian enterprises restricted from trading in dollars due to sanctions.

Russian enterprises are settling more of their trade in yuan and increasing their borrowing in the Chinese currency. Moscow is likewise expanding its yuan holdings in its foreign exchange reserves.

Russia-China trade has increased dramatically since the February invasion of Ukraine. China is importing more oil from Russia than ever before, while its exports to Russia are increasing at a double-digit rate even as sales to many other countries stall.

Some Russian enterprises are also turning to Chinese currency bonds for funding. Rosneft PJSC, the Russian oil behemoth, is preparing the country’s largest yuan-denominated bond.

Polyus PJSC, Russia’s largest gold miner, upped the 5-year yuan bonds it sold from 3.5 billion yuan to 4.6 billion yuan ($660 million). In July, aluminum behemoth United Co. Rusal International issued yuan bonds.

According to Bloomberg News, Russia’s government is considering buying up to $70 billion in yuan and other currencies this year to moderate the ruble’s rise before changing to a longer-term policy of selling its holdings of the Yuan to fund investment.

Even before the conflict, Russia had become one of the world’s top holders of Chinese cash reserves.

IMF Strengthens Yuan

According to figures from the People’s Bank of China, the value of China’s commerce settled in renminbi hit a record high of 2.5 trillion yuan in the 2nd quarter, suggesting an exports boom that has only lately begun to slow.

At the same time, central banks are increasingly diversifying their holdings of dollars. According to the PBOC, the yuan’s proportion of official foreign exchange reserves increased to 2.88% in the 1st quarter of this year, up from 1.2% in 2017.

In May, the International Monetary Fund increased the yuan’s strength in the Special Drawing Rights currency level to 12.28% from 10.92%. Sales of government and corporate debt denominated in offshore yuan, known as Dim Sum bonds, reached a new high in the Hong Kong bond market.

The increase in bilateral trade with Russia may also be helping China’s cross-border interbank yuan payment system, which CIPS Co manages.

While CIPS has a fraction of the transaction volume of SWIFT, it is rapidly rising. Chief executive officer Xu Zaiyue said the daily value of transactions handled by the CIPS system in the 1st half of 2022 was 21 times that of 2016, and most overseas yuan settlement banks have already or will soon be connected to the CIPS.

According to Becky Liu, head of China macro strategy at Standard Chartered Plc, the yuan’s status will be bolstered by the sheer weight of China’s global economic influence, closer relations with the so-called BRICS countries of Brazil, Russia, India, and South Africa, and central bank diversification.

China has been promoting its central bank’s digital money to its population to broaden its reach.

Furthermore, economist John Hopkins argues that imposing sanctions on Russia may be detrimental to the West.

In a tweet, he stated that while weaponizing the SWIFT international payments system may cut Russia off, it also “risks undermining the dollar-dominated global financial system.”

It will lead to the developing of alternative systems by China and Russia.’