China's Renminbi Continues to Take Market Share Among Global Currencies

06/11/2014 11:00 am EST

Focus: CURRENCIES

Jim Jubak

Founder and Editor, JubakPicks.com

According to MoneyShow's Jim Jubak, the Chinese renminbi still has a long road ahead of it as it tries to catch up to the US dollar—currently considered the global currency—but he thinks the world should still take note, because the renminbi is gaining ground.

No matter how you count it—or indeed, what you call it—China's currency, the renminbi, or the yuan, continues to make inroads into the dollar's dominance as the de facto world currency.

The renminbi has a way to go before it catches up with the dollar, but the issue of when it will, or indeed, if it will, has huge consequences for global economies and markets. The US gets a big boost from the dollar's role as the global currency. It means more demand for US Treasuries (and lower interest rates). It underlies the stature of New York as a financial center. It provides price stability and predictability for US consumers of commodities, such as oil, that are priced in dollars. And it damps the effect of budget idiocy in Washington on US financial markets and the US economy.

The growing size of China's economy would always have meant a gradual increase in the role of China's currency in global financial markets. But the fallout from the global financial crisis—when US—and other developed economies and markets—didn't exactly earn investor confidence—has accelerated the search for alternatives to the dollar, euro, and yen. The budget deficits in those economies, plus the likely effect of aging populations, have also added to the search for alternatives. And finally, the recent conflict with Russia, and the imposition of sanctions that have limited the ability of Russian banks and companies to access Western capital markets, has given a additional boost to the search for alternatives. Russian companies have been moving to open accounts in Asian currencies such as the Hong Kong and Singapore dollars—and the renminbi—Deutsche Bank reports, on the possibility of further US and EuroZone sanctions.

At the moment, there's no doubt that the renminbi is gaining market share. By March 2014, the currency had climbed to seventh in the world when ranked by value of payments made in that currency. The renminbi then ranked behind only the dollar, euro, pound, yen, and the Australian and Canadian dollars. In January 2013, the renminbi ranked on this same measure in 13th place. In the last three years, the currency has moved ahead of 22 other currencies, according to Bank of America Merrill Lynch.

The value of payments made in a currency isn't the only way to measure the renminbi's standing in the world. For example, there's a ranking based on a currency's use in trade finance in instruments such as letters of credit and collection. On that measure, the renminbi moved up to a market share of 8.66%, moving ahead of the euro, as of October 2013. (That was up from 1.89% in January 2012). The US dollar has a market share of 81.1% on this basis.

As you'd imagine, the renminbi isn't used uniformly around the world. The top five countries that use the renminbi for trade are China, Hong Kong, Singapore, Germany, and Australia.

The future advance of the renminbi among trade currencies depends mostly on how fast the Chinese government advances policies to internationalize the currency and on how nervous US fiscal policy makes the financial markets. The recent relaxation of the rules governing cross-boarder currency sweeps, for example, is part of Beijing's efforts to encourage more countries to use the renminbi in payments and trade settlements with Chinese companies. In 2010, only 3% of China's total trade was settled in renminbi. The percentage is 18% today, according to the People's Bank.

The most important recent move is a pilot program that makes it easier to get excess liquidity out of China, a big concern for multinationals thinking about using the renminbi. It's pretty clear that the People's Bank is as nervous about this experiment as corporate CFOs.

But the renminbi market just keeps getting deeper. According to HSBC, 10,000 financial institutions now do business in the Chinese currency, up from 900 in June 2011. Paris, Luxembourg, and Frankfurt now count as major renminbi liquidity centers—along with older players such as Hong Kong, Singapore, Taiwan, and London.

Stronger growth in the US economy, a stable dollar (no more subprime mortgage crises), and a reduction in fiscal brinkmanship in Washington would help the dollar retain market share, but that only means the renminbi's rate of growth in global financial markets would slow. Continued gains by the Chinese currency seem certain as the Chinese economy continues to grow in size.

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