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Yuan ends into the world`s top five as payment currency

2015-01-29 10:37:34Source:China DailyAuthor:

The yuan moved into the top five among world payment currencies in November, overtaking the Canadian and Australian dollars by value, the Society for Worldwide Interbank Financial Telecommunication said on Wednesday.

In December, the Chinese currency reached a record high share of 2.17 percent in global payments by value, rising from 0.63 percent in January 2013. It now trails the Japanese yen, which has a share of 2.69 percent.

"The renminbi breaking into the top five world payment currencies is a milestone. It is a great testimony to the internationalization of the renminbi and confirms its transition from an 'emerging' to a 'business as usual' payment currency," said Wim Raymaekers, head of banking markets at SWIFT.

"The rise of various offshore renminbi clearing centers around the world, including eight new agreements signed with the People's Bank of China in 2014, was a key driver of this growth," Raymaekers said.

Global renminbi payments increased in value by 20.3 percent in December, compared with a 14.9 percent rise for all currencies. Over the past two years, the renminbi has shown consistent triple-digit growth with an increase in the value of payments by 321 percent, SWIFT data showed.

China's currency continued its ascent in global payments settlement, trade and currency investment with the support of a rapidly expanding network of offshore yuan-clearing centers, which facilitate direct access to China's onshore financial markets, said Fitch Ratings in a report earlier this month.

In 2014, eight offshore yuan-clearing centers were established in major financial centers such as London, Frankfurt and Luxembourg. An additional two were established in Kuala Lumpur and Bangkok. There are now 14 offshore yuan-clearing centers.

Fitch Ratings expects the proliferation of these offshore yuan-clearing centers to drive greater issuance of dim sum bonds (yuan-denominated debt issued offshore) by Chinese and other governments, financial institutions and corporations in 2015.

The yuan declined to a record discount against the Chinese central bank's reference rate on Wednesday, pushing it toward the daily trading limit as the dollar strengthened.

The currency dropped 0.07 percent to close at 6.248 per dollar in Shanghai, according to prices from the China Foreign Exchange Trade System. It fell to as low as 6.2488, or 1.97 percent weaker than the People's Bank of China reference rate and close to the daily trading band's limit of 2 percent.

The monetary authority raised the fixing by 0.13 percent on Wednesday, the most since Dec 8, to 6.1282.

On Monday, the yuan touched a seven-month low of 6.2569.

Liu Hong, a researcher at Bank of China (Hong Kong) Ltd, said in an article on Tuesday that the latest weakness of the yuan was influenced by the US Dollar Index hitting 52-week high of 95.48 on Friday.

The US Dollar Index measures the value of the dollar against a basket of foreign currencies.

It was launched at 100 in March 1973 and has traded at a high of nearly 165 (February 1985) and a low of about 71 (March 2008). The basket represents most of the currencies of the United States' major trading partners, but not China. The basket is about 57 percent in the euro, 13 percent in the yen and 9 percent in the Canadian dollar.

Related story: Yuan suffers biggest loss since 2008, by Zheng Yangpeng, China Daily

The yuan's value tested the boundaries of what the authorities will tolerate on Monday, trading as much as 1.94 percent weaker than the lower limit of the People's Bank of China's reference rate.

Further declines are possible as the dollar has been strengthening in response to the European Central Bank's quantitative easing program and the outcome of the Greek parliamentary elections, analysts said.

But they said that China still has plenty of tools to prevent a sharp decline.

The yuan slid 0.41 percent to 6.2542 per dollar in Shanghai on Jan 26, extending a decline of 0.31 percent on Friday, according to securities information provider Wind Information Co Ltd.

It was the currency's biggest two-day loss since 2008, when markets were shaken by the global financial crisis.

The PBOC sets a reference rate every trading day and imposes a trading band of 2 percent. If the currency touches the bottom of the reference range, the central bank can take one of three steps: intervene to support the yuan, cut the reference rate or widen the band.

The central bank adjusted its daily fixing lower to 6.1384 from 6.1342 previously to prevent the spot rate from hitting the bottom of the range.

"The dollar is on a cyclical rise, rather than an instant one," said Ding Zhijie, a professor of international finance at the University of International Business and Economics in Beijing. "That means downward pressure for all major currencies around the world, not only the yuan."

Wang Youxin, a researcher at the Institute of International Finance under Bank of China Ltd, noted the 12-month nondeliverable yuan forwards, which signal the offshore market's outlook for the currency's value, have been declining since July.

That trend implies that the global market's bet on a weaker yuan a year down the line is based on China's own declining economic growth.

"Given the situation, widening the trading band is an option. Further, the central bank should shift from its strategy of a de facto peg of the yuan against the dollar to one that gives other major currencies more weight," said Wang.

That could lead to a scenario where the Chinese currency depreciates against the dollar while also appreciating against, for example, the euro, instead of falling against all currencies just because of a dollar rally.

In terms of the trading band, many institutions have speculated that the PBOC may widen the band to 3 percent this year as long as the currency continues to demonstrate two-way volatility.

Ding said that doing so might prompt institutions to bet on continuous appreciation of the dollar and buy the dollar, which would prompt a further slide of the yuan.

Instead, he said, there is still room to use the reference rate to prop up the currency.

Many expect the yuan to depreciate slightly against the dollar in 2015. Fielding Chen, a China economist with Bloomberg, said in a note that a big drop is unlikely, because such a drop would inspire political pressure from the US.

Significant depreciation might also trigger big capital outflows, which would threaten the financial sector's stability, Chen said.

As the PBOC is expected to cut interest rates this year, a narrower yuan-dollar interest rate differential could deter capital inflows while contributing to the depreciation of the yuan.

But Wang said there are also factors positive for appreciation. For example, the falling oil price would push up China's trade surplus.