Tags: China | yuan | euro | transactions

China's Yuan Eclipses Euro in World Trade. Next Target: US Dollar?

Wednesday, 04 Dec 2013 01:16 PM

By John Morgan

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More global trade is now settled in Chinese yuan than in euros, a currency reversal that took less than a year to occur, Quartz reported.

But there are some big hurdles for it to overcome before the yuan eclipses the U.S. dollar.

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As recently as January 2012, the euro accounted for 7.9 percent of global trade finance, and the yuan just 1.9 percent.

But in October, the yuan overtook the euro to claim 8.7 percent of world trade versus the euro’s 6.6 percent, according to the Society for Worldwide Interbank Financial Telecommunication, an industry group that tracks trade settlements.

That places the yuan as the world’s second-most-used trading currency behind the dollar.

“The trend is important because the yuan’s rise reflects the world’s confidence in China’s financial system, economy and government,” Quartz reported. “Many see this prospect as a threat to the dollar (and, to some extent, euro) supremacy, which helps those countries to borrow cheaply.”

But due to opaque banking practices in China, it is actually difficult to determine the extent of the upheaval caused by the yuan.

Chinese importers tend to settle transactions in yuan, but the prices for their products are often set in other currencies. Yuan settlement dropped dramatically in June, when the Chinese government cracked down on bogus trade invoicing, before picking up again in the fall.

“That means it’s possible that the yuan’s newfound popularity reflects speculation more than it does confidence in China’s currency and economy.”

The U.S. dollar’s share of global trade finance dipped from 85 percent in January 2012 to 81 percent in October 2013.

Quartz noted there is a vast difference between settling trade in yuan and using it for investments or to replace the dollar as a reserve currency.

“The government has done little to open China’s capital account. Doing so would risk a deluge of illicit outflows, driving up interest rates and probably crashing China’s already demand-sapped stock market.

“Letting the market set interest rates would likely bankrupt hundreds of state-owned companies. And to guarantee sufficient yuan liquidity, China would probably need to run a trade deficit, stunting growth.”

The Wall Street Journal
reported the yuan may be playing a bigger role in credit instruments, but that “not much of the currency is actually changing hands outside China.”

According to SWIFT, the yuan is used to pay for only 0.8 percent of all global transactions, the Journal said.

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