The Chinese look forward to their lunar newyear in February 2014, their currency is surging. The end of 2013showed the rising popularity of China’s renminbi (ISO currency codeCNY, for Chinese Yuan Renminbi), which surpassed 22 othercountries’ currencies to rank as the eighth most used currency forwholesale and retail payments in the world. This rise has beenattributed to the renminbi’s appreciation, growing trade volumes,and attractiveness as a conduit for portfolio investments.
According to the Society of Worldwide Interbank Telecommunication(SWIFT), the fact that between November and December of 2013 othercurrencies grew 7% while the renminbi grew 15% suggests that theuse of the Chinese currency is becoming business as usual for theworld’s financial institutions and large corporates. The renminbi’s2% appreciation against the U.S. dollar in 2013 has also boostedthe currency’s attractiveness as a store of value and improved itsliquidity. Some 74% of renminbi payments is concentrated in HongKong, where the renminbi is readily available to settle trade andretail transactions from around the world. But the United States,United Kingdom, Singapore, and Taiwan are also seeing growth inrenminbi payments. In absolute terms, however, the U.S. dollar andthe euro are still dominant, accounting for 39.5% and 33.2%respectively of all payment transactions globally compared with therenminbi’s 1.1%. The Chinese currency is gaining fast against theSwiss franc, the seventh most used currency in the world.
The main advantages of trading directly in renminbi rather than asettlement currency such as the U.S. dollar are that it cuts downon uncertainties and reduces the cost of doing business as bothwholesale and retail payment volumes continue to grow in China. Itreduces uncertainties because renminbi transactions are not subjectto major currency swings as are the U.S. dollar and the euro andthe currency has been relatively stable for the last few years dueto the strength and size of China’s foreign currency reserves. Manybankers in the Asia-Pacific region believe that the renminbi willcontinue to solidify its position as a global currency and willbecome a fully convertible currency within the next five years.Partial convertibility remains the norm today because the renminbiis limited to certain types of transactions that are permitted bythe Chinese government.
In 2014, Mercator Advisory Group will continue research on topicssuch as the rise of Alibaba and Alipay not just in their homemarket but as they expand in the United States and globally as wellas emerging technology topics in the foreign exchange retail andwholesale payment space. With China’s continued growth of itsforeign exchange reserves, newer emerging technology tools toinitiate currency trades, and the strengthening of the renminbi,the “Year of the Horse” may turn out to make this currency evenstronger than the lucky eighth (the number 8 being consideredauspicious in China) position it currently holds as a form ofpayment.
To read more about trends in China’s payment systems, stay tunedfor new research on Alibaba and Alipay to be published in February2014 by Mercator Advisory Group’s Emerging Technologies Advisory Service as well asforthcoming coverage in our InternationalAdvisory Service.