China’s currency rises in cross-border trade but remains limited globally
China’s renminbi has gained market share in international payments, particularly in the country’s own cross-border transactions, as policymakers push for the currency to be used more widely. But the renminbi’s use remains limited globally, especially relative to the size of China’s GDP and its influence in trade, according to Goldman Sachs Research.
In March, the renminbi surpassed the U.S. dollar for the first time and became the dominant currency in China’s own cross-border payments, according to China’s State Administration of Foreign Exchange (SAFE). Its share of settlement in China’s cross-border payments increased to 47% in 2021, almost double the share five years earlier. Foreigners’ trading of renminbi assets was a big part of the reason for the uptick. However, the renminbi’s use in payments worldwide is still limited — its global market share increased to 2.5% as of May 2023, from 1.1% by the end of 2013, Goldman Sachs economist Maggie Wei writes in the team’s report.
The renminbi has gained market share and therefore made progress in functioning as a “medium of exchange” in global markets, Wei writes. But progress appears slow in other respects. While China is becoming increasingly important in global goods, services, and financial markets, the world’s second-largest economy still has capital controls in place and the renminbi is not entirely freely tradable, which could limit its progress when it comes to being a “store of value” and “unit of account.” The U.S. dollar is still the dominant currency in international payments, accounting for 43% in May, according to SWIFT. Some 32% of international payments were in euros, 7% in British pounds, and 3.2% in Japanese yen.
But even as the increase in the use China’s currency in international payments has been slow, its uptake in China’s cross-border transactions has been rapid, according to Goldman Sachs Research. The increase was mainly due to more active foreign trading of renminbi-denominated securities: Cross-border renminbi payments related to portfolio investment (ie, stock and bond investments) were RMB 21 trillion ($2.9 trillion), while total current account cross-border payments (goods and services trade included) were only RMB 7.9 trillion in 2021. China’s A-shares in the domestic stock market and onshore renminbi-denominated bonds have been included in major global equity and bond indexes respectively since 2018, which contributed to the higher cross-border renminbi payments related to portfolio investment.
As a share of total goods and services trade, renminbi-settled trade rose to 19.8% as of the third quarter of 2022, 5.8 percentage points higher than 10 years ago, Wei writes. The higher usage of renminbi in China’s cross border payments for trade seems to be relatively broad-based.
Earlier this year, Brazil and Argentina announced they would allow renminbi settlements in trading with China, and Brazil’s relationship with China helps illustrate the constraints and opportunities for China to internationalize its currency. Joint statements from China and Brazil allow, but don’t require, the two countries to trade in local currencies. Brazil’s exports to China ($88 billion in 2021) mainly consist of commodities which are mostly settled in U.S. dollars. For Brazilian exporters to accept renminbi payments, our economists expect the currency would need to be recycled by Brazilian importers purchasing Chinese goods. (Brazil’s total imports from China were $51 billion in 2021.) For this channel to increase the RMB share of China’s total goods trade settlement materially, China would need to have renminbi settlement agreements with more trading partners than just Brazil.
Countries where China exports make up a large amount of market share might be more willing to use renminbi to settle imports from their Chinese counterparties, according to Goldman Sachs Research. But even so, given China's capital controls, the shortage of offshore liquidity in the currency becomes a constraint for these partners to settle trade in renminbi. To facilitate more usage of renminbi in trade settlements, the People’s Bank of China has extended bilateral swap lines with many economies.
When it comes to store of value, China’s currency is still little used. In international bond markets, debt securities denominated in renminbi were only around 0.7%, according to Bank for International Settlements data, in comparison with 0.4% 10 years ago, Wei writes. Reserves denominated in China’s currency accounted for around 3% of global reserves, higher than the 1% in 2016 but still low in absolute levels.
At the same time, a wide range of renminbi-denominated assets are available in Hong Kong, the offshore center for renminbi, for global investors: these include bonds, investment funds, commodity-linked products, ETFs, real estate investment trusts, equities, and insurance products.
Historically, it’s the extensive circulation of a currency in international markets that has paved the way for the internationalization of the likes of the U.S. dollar, euro, and Japanese yen, according to Goldman Sachs Research. For example, the offshore U.S. dollar market accounts for more than 25% of global dollar funding. Offshore euro-denominated loans and deposits also accounted for close to 20% of overall loans and deposits in that currency. By comparison, offshore renminbi loans and deposits were around RMB 2 trillion (2021 data), only around 0.5% of total renminbi loans and deposits onshore.
Geopolitical uncertainties could potentially support the internationalization of China’s currency if global investors and reserve managers decide to diversify their portfolios, Wei writes. In the near-term, however, the un-favorable interest rate spread between China and major developed markets might lower investors' incentive for holding more renminbi assets.
“Overall, the higher usage of renminbi in international transactions was mostly through China’s own cross border payments, while among third-party markets the usage of renminbi is limited,” she adds. “Compared with China’s share in global GDP, merchandise trade, international investment position, or China’s currency reserves as a proportion of global reserves, renminbi denominated reserves still remain very low.”
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