BOFIT Viikkokatsaus / BOFIT Weekly 2019/39

The yuan (CNY), which is still not freely convertible due to China’s strict currency controls, has yet to establish itself as a credible alternative in international payments and investment. As a result, the yuan has failed to establish itself as an international currency proportional to the size of the Chinese economy.

China has sought for years to increase international use of the yuan. In 2010, Chinese importers were granted permission to make payments in yuan via “offshore” banks in Hong Kong and foreigners were permitted to open yuan bank accounts in Hong Kong. Issuance of yuan-denominated bonds in Hong Kong also soared. Along with other objectives, the rationale for reduction in interest-rate regulation and slight relaxation of exchange-rate policy have been to promote international yuan use. To encourage Chinese exports and the international use of the yuan, the People’s Bank of China has agreed with over 30 central banks on a system of bilateral currency swaps to develop a reciprocal credit line in participant currencies.

The Bank for International Settlements (BIS) recently released its breakdown of the volume of foreign currencies traded on forex markets during April 2019. The yuan was only the eighth-most-converted currency and its share of the global OTC currency exchange has grown slowly. Only 4 % of forex trades involve the yuan as a converted currency. The Russian ruble was on the other side in 1 % of currency trades.

The Society for Worldwide International Financial Telecommunication (SWIFT) collects information about the use of various currencies in international payments. 2.2 % of all international payments traffic last August was in yuan, raising the yuan back to fifth place among the most-used payments currencies. Yuan-denominated customer payments made and received outside China occurred above all in Hong Kong. The next largest yuan-clearing centres were in the UK and Singapore.

The IMF reports that the yuan accounts for 1.8 % of global currency reserves. In Russia, however, yuan accounted for 14 % of total reserves in December 2018. In 2016, the yuan was added to the IMF’s SDR currency basket with a weighting of just under 11 %. With the pace of China’s reforms slowing, the use of the yuan has disappointed the expectations.