A recent Bloomberg Intelligence (BI) analysis, based on data from the State Administration of Foreign Exchange, reveals that the Chinese Yuan now accounts for 48% of China’s cross-border payments and receipts, up from virtually zero in 2010. This marks a new record high for the local currency.
Meanwhile, the US dollar’s share has dropped from 83% to 47% over the same period. The percentage is calculated using the total volume of transactions, encompassing securities trading through connections between Hong Kong and mainland China’s financial markets. Stephen Chiu, BI’s chief Asia foreign-exchange and rates strategist, explains that the rise in yuan usage could be a natural outcome of China’s capital account opening up and increased inflows to Chinese bonds and outflows to Hong Kong stocks.
The trend is expected to continue, as China’s State Council announced on April 25 that the nation will further expand the use of the yuan for cross-border transactions in order to boost international commerce.
Yuan’s impact on Dollar dominance
Although the yuan’s growing role represents a challenge to the dollar, it remains small. Chris Leung, an economist at DBS Bank, points out that while yuan internationalization is accelerating, it still has a long way to go before it can significantly disrupt dollar dominance. According to SWIFT, the yuan’s share of global payments remained stable at 2.3% in March.
This information emerges as the yuan weakens against the US dollar. On April 26, the China Foreign Exchange Trade System reported a 390-pip drop in the central parity rate of the yuan, or renminbi, to 6.9237 against the dollar. Former Treasury Secretary Larry Summers recently dismissed the idea of the yuan posing a significant threat to the dollar, citing China’s capital outflows and market unreliability.