The Chinese Renminbi (RMB) leaped in front of the euro in October as a currency used for trade-finance transactions, according to data collected by the Society for Worldwide Interbank Financial Telecommunication, otherwise known as SWIFT. However, it’s unlikely to become a major trade-finance currency in the foreseeable future.
The RMB’s share was 8.66 percent in October, up from 4.4 percent in October 2012 and 1.89 percent in January 2012. Meanwhile, the Euro’s share dropped to 6.64 percent in October of this year, down from 7.87 percent in 2012, and the U.S. dollar (USD) remains the leading currency, with a share of 81.08 percent.
In October, the top five counties using RMB for trade finance, which SWIFT defines as traditional letters of credit and collections, were China, Hong Kong, Singapore, Germany and Australia.
SWIFT data also showed that the RMB remained the 12th most active payments currency globally. Its share of activity decreased slightly to 0.84 percent in October from 0.86 percent a month earlier, but it’s up from 0.25 percent at the start of 2012.
“While still less than 1 percent of global activity, it has seen a tripling of activity of a relatively short period of time,” said Jim Wills, senior business manager at SWIFT.
Mr. Wills said the RMB’s increased use for trade-finance transactions does not necessarily mean a decrease in use of the USD. “The growth in international trade is such that the whole pool is rising. We anticipate there will be roughly the same level of dollar or non-RMB payments that we’ve had in the past,” Mr. Wills said, adding that SWIFT anticipates global trade nearly tripling by 2020.
However, the RMB is unlikely to reduce the USD’s role in trade finance significantly in the foreseeable future. “Until the major commodities are traded in RMB and until the RMB is freely convertible, I think that the growth will continue, but be limited to Chinese exporters and importers,” said Jeffrey Wallace, managing partner at Greenwich Treasury Advisors.
Mr. Wills agreed, noting that today one side of the trade is typically a mainland Chinese company—including multinationals producing and exporting from China—while the other side is a company most likely in the Asia Pacific region. He said growth in RMB as a trading currency will be driven in the foreseeable future primarily by exports.
“China has a voracious appetite for iron ore. If suddenly we see these types of commodities traded in RBM, then we’ll see a dramatic uptick in [trade finance] activity in RMB,” Mr. Wills said.
It may be some time before that happens, however. John Ahearn, global head of trade at Citigroup, distinguished between transactional data and actually financing the trade. “When a company issues a letter of credit (LOC), or does a documentary credit or import collection, that type of bank-to-bank communication goes through SWIFT. But when the client says, ‘OK, now I need my bank to give me import financing, those transactions do not go through SWIFT,” Mr. Ahearn explained.
Mr. Ahearn added that while most global banks are ready to provide trade financing, such transactions remain relatively small because there’s insufficient liquidity in the foreign exchange (FX) market to hedge the currency risk. For that to happen, Mr. Ahearn said, the RMB must become much more liquid, and that will require reducing currency controls further and improving necessary components such as market makers that are still in early stages.
Mr. Ahearn said that at the transaction level use of the RMB has increased significantly, especially with respect to commodities, and Chinese companies are actively pushing suppliers to do transactions in RMB to win business. For now, however, it’s difficult for those suppliers to hedge their exposure.
“Bank and multinationals can already handle or are gearing up to handle RMB as a trade financing currency, and to be able to invoice and settle transactions in RMB,” Mr. Ahearn said. “But until there is a realistic hedging capability in the currency, it’s going to be awhile before it takes the main stage.”