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The expansion of yuan settlements in trade seen since early 2020 will continue, analysts say, as companies look to hedge concerns over the changing rates in a more complicated geopolitical environment.
Data from international insurance company Allianz Trade showed that the share of Chinese trade settled in yuan rose from less than 20 per cent to nearly 30 per cent between early 2020 and August 2022, while more than 40 per cent of global trade is conducted with US dollars.
“Companies, indeed, are using more yuan in trade settlement due to various reasons, such as their estimation of the future foreign exchange rate,” said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group.
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Companies will make decisions according to their hedging concerns, Yeung added, because what currencies they use is related to the overall cost, and it’s tied to foreign exchange and interest rates.
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For years, China has sought to increase global use of the yuan. The yuan’s internationalisation has become more critical amid the threat of financial decoupling from the US amid Western sanctions over Russia’s invasion of Ukraine.
Kelvin Lau, senior economist at Standard Chartered, attributed the increase in yuan settlements to diversification needs, owing to the geopolitical situation in Ukraine as well as renewed US-China tensions surrounding cross-strait and technology issues.
“Our data shows that [yuan] trade settlement for goods did rise evidently in absolute terms,” he added.
The amount of yuan trade settlement tends to rise when investors expect the currency to rise, while the amount of trade settlement tends to decline if investors expect it to be weakened, explained Michael Pettis, senior fellow at the Carnegie Endowment for International Peace.
Pettis, however, noted that the strict capital controls imposed by the Chinese government could be an explanation for the rising yuan settlement in trade.
“When investors want to speculate on the yuan’s rise ... they seem to denominate more trade in renminbi, probably as a way of getting exposure to the currency that they could not get directly,” he added.
During 2020 and 2021, Lau explained, the yuan was mostly on an appreciation trend, and the broader momentum of yuan internationalisation also showed signs of reacceleration, especially in the form of rising foreign holdings of onshore China assets.
Yeung at the Australia and New Zealand Banking Group added that China’s “robust exports” since 2020 have been another contributing factor to using more yuan in trade settlement.
“[China is] an important part of the electronic supply chain ... that is related to smartphones and computers,” he said. “China also exported a lot of Covid-related products to the world over the past two years.”
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China ended 2020 with strong exports, as it exported 40 masks per person around the world. The nation also enjoyed a strong trade performance in 2021 amid pandemic uncertainties.
The latest figures from financial messaging service Swift showed that offshore yuan payments, excluding Hong Kong, recorded a share of 28 per cent as of September this year, up from 25 per cent in the same month in 2021 and 2020.
Stephen Olson, senior research fellow at the Hinrich Foundation, said that China will continue to take whatever steps it can to increase the portion of global trade settled in the yuan rather than the US dollar.
“From the perspective of China’s leadership, the handwriting is on the wall: in an era of rising geostrategic tensions, any area in which China is economically dependent on the US can create vulnerabilities and risk,” he added.
Yao Li, an associate professor of economics at the Hong Kong University of Science and Technology, said that the decoupling trend between China and the US will lead to the emergence of more regional trade blocs, which will use their own settlement currencies and methods.
“As a result, we expect to see the proportion of yuan settlement further rise,” she added, pointing to the Regional Comprehensive Economic Partnership that the yuan and the Singapore dollar are likely to be more adopted for in future international settlements between member countries.
In addition to regional trade relations, Yeung said: “Some Chinese companies will go through Hong Kong to do trade settlements, which provides them with more flexibility to choose which currency the companies want to use.”
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According to Ludovic Subran, chief economist at Allianz, there is an increased tendency of mainland Chinese financial institutions operating through Hong Kong’s banks and non-bank financial institutions to mitigate potential contingencies from corresponding relationships with Western banks.
Data from Swift showed that offshore yuan payments in Hong Kong accounted for 72 per cent as of September, which stayed at the level of over 70 per cent for the past years.
“In the long run, there will be more yuan settlements in global trade if Hong Kong’s role as a settlement centre doesn’t change,” Yeung added.
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