China Business Weekly
Suwatchai Songwanich
Chief executive officer,
Bangkok Bank (China) November 5, 2012 1:00 am
According to SWIFT, the Society for Worldwide Interbank Financial Telecommunication, payments to China are by far the largest for any country and yet most take place in currencies other than the yuan.
One explanation is that the yuan is still not yet a fully convertible currency and China took its first tentative steps towards convertibility only three years ago. However the growth of the yuan since then has been phenomenal. In August, yuan-denominated trade transactions rose to 10% of China's total trade, up from 0.5 per cent three years ago, when the cross border settlement pilot was first introduced. And whereas payments in global currencies fell on average by 0.9 per cent from July 1 to August 31, global payments in yuan rose 15.6% during the same period.
For now, more than 80 percent of all CNY payments go through Hong Kong; however Singapore aims to become an alternative to Hong Kong in the rapidly growing offshore market for yuan. This too will help to stimulate the growing use of the yuan, given Singapore's status as a leading financial centre. Already Singapore has more than 60 billion yuan in bank deposits. Meanwhile, a real estate investment trust, Dynasty REIT, announced in October that it would be launching the first-ever yuan-denominated initial public offering.
Although it will take years before the use of the yuan has any meaningful impact on global and regional economies, when it does, the gains and losses will be significant.
The winners will include corporate customers trading with China or with Chinese companies as they will be able to avoid exchange rate risks and save on costs from intermediary banks by trading directly in yuan rather than converting into third currencies.
Other winners will include Asian governments, corporations, institutions and banks that will have an alternative vehicle for their savings apart from low interest-rate US, Japanese or European bonds and treasuries.
Many central banks have already begun diversifying their reserves into holdings of yuan. In July the Asian Development Bank said the yuan was being increasingly used to settle trade transactions in Asia, pointing out that it is "gradually cementing its way to becoming a regional anchor currency."
The increasing use of the yuan will also provide opportunities for Asian banks which will be able to gain new business by offering liquidity, clearing and reporting services in yuan, as well as new financial instruments denominated in yuan such as bonds and debentures.
The interest in the yuan is not only coming from Asia. European corporations are increasingly making settlements in yuan, and according to SWIFT, by June of this year 91 countries were using yuan, compared with just 65 a year earlier.
The increasing use of the yuan in international trade is of particular interest to Asean countries because of their close economic and trade ties with China. Already 30 per cent of Singapore's trade payments to Hong Kong and China are in yuan and an increasing number of Thai corporations are also making and receiving payments in yuan.
The widespread use of the yuan as a currency of settlement will not happen overnight, but by the time the AEC comes into being in just over two years' time it should be well established. With the IMF forecasting that China will overtake America as the world's largest economy by 2016, perhaps one day, the yuan will even challenge the mighty US dollar as a global reserve currency.
For more columns in this series please see www.bangkokbank.com
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Source: http://www.nationmultimedia.com/opinion/The-rise-and-rise-of-the-yuan-30193637.html
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