By Tom Westbrook
SINGAPORE, April 27 (Reuters) - China's yuan currency is
slowly but surely being adopted for more international payments,
which analysts say could lay foundations for a trade system
running parallel to the dominant U.S. dollar.
In the past day alone, data showed that more cross-border
transactions with China were settled in yuan in March than in
dollars for the first time, and that Argentina said it aims to
regularly pay for Chinese goods in yuan and not dollars.
While the dollar dominates world trade settlements, the news
comes amid a steady drumbeat of more and more bilateral deals
arranging yuan payments with China -- from Chinese oil purchases
in the Middle East to trade with partners from Brazil to Russia.
True global yuan adoption is unlikely, given expectations
that Beijing will want to keep a tight grip on the currency. But
incremental progress is already fashioning a new trade
architecture and is gaining pace, particularly as Russia's
expulsion from much of the West's payment systems has
accelerated the development of alternatives.
"The world's largest commodity exporters and importers -
China, Russia and Brazil - are now working together on using
renminbi for cross-border payments," said Chi Lo, senior
investment strategist at BNP Paribas Asset Management in Hong
Kong.
"Their cooperation could draw other countries to renminbi
payments over time and cumulatively, this group could lift the
renminbi at the expense of the dollar," he said.
China has long sought to increase the yuan's undersized 2.2%
share of global payments, but seemingly without being willing to
open its capital accounts and allow the sort of free-flowing
movement that makes dollars, euros and yen so convenient.
Russia's war on Ukraine, and the resulting Western
sanctions, has given substance to the push. Suddenly, Russia has
come from virtually nowhere to become the fourth-largest
yuan-trading hub outside China.
The yuan's share of Russia's currency market has leapt to
40% to 45%, from less than 1% at the start of last year. Its
share of world trade financing, according to SWIFT, has
increased to 4.5% in February from 1.3% two years ago. The
dollar's is 84%.
"It will not replace the U.S. dollar globally, but it is
already starting to replace the dollar in some of China’s trade
relationships," said Gerard DiPippo and Andrea Leonard Palazzi,
economists at Washington's Center for Strategic and
International Studies, in an article last week.
"This kind of renminbi internationalisation may achieve
Beijing's goals, including reducing China’s exposure to exchange
rate fluctuations and mitigating China’s vulnerabilities to U.S.
financial sanctions."
SLOW MOVING
World trade flows are dominated by dollars, euros, sterling
and yen because those currencies are freely available and
connected to open economies in ways the capital-controlled yuan
is not. To be sure, there are no signs that is changing.
"In most trades, importers have a comparative advantage in
determining the terms of trades, such as pricing and settlement
currency," says Zhang Yu, chief macro analyst at Huachuang
Securities in Beijing.
"Therefore, if exporters want to use yuan to settle trades,
they must persuade foreign importers to pay in yuan, which often
takes a long time."
China itself needs time to create depth in a limited pool of
yuan outside its shores, which is less easy for Beijing to
control.
"For yuan usage to grow in scale it make take 10 years or
longer," says Andre Wheeler, chief executive of supply chain,
trade risk consultancy Wheeler Management Consulting based in
Australia.
"If they were to try to change Australia iron ore trades to
be settled in yuan, I don’t think China would be able to cope
with that scale."
Yet the yuan offers other attractions to China's trading
partners. In Argentina's case, buying goods in yuan saves
draining dwindling dollar reserves. More broadly, each new
adopter adds to a currency system's depth and usefulness.
"One of the many reasons for using the dollar is what we
call network effects," said Michael Pettis, senior fellow at
Carnegie China.
"The more of us that use it, the cheaper it becomes to use
and the more efficient it becomes to use," he said.
"By trying to force more and more of its trade into
renminbi, Beijing is trying to create network effects that will
make use of the renminbi for trade that much easier and with
lower frictional costs."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China offshore yuan usage ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Tom Westbrook, additional reporting by Samuel
Shen and Winni Zhou in Shanghai, Georgina Lee in Hong Kong
Editing by Vidya Ranganathan and Kim Coghill)
