Yuan Facing International Trade Headwinds

By Anjani Trivedi 

        HONG KONG--The role of China's yuan in international trade is facing headwinds, driven by sharp moves in foreign-exchange markets and a potential blow to Beijing as it pushes for a bigger role for its currency abroad.
        The overall usage of China's currency by global companies has dropped 5% over the last year, driven by European companies scaling back its use as the euro's value has plunged against the yuan, according to an investor survey by HSBC Holdings. In Hong Kong, the largest offshore market for the yuan, usage has dropped 6% though remained steady in other Asian hubs.
        The shrinking usage of the currency abroad is a reversal after years of increasing use to settle trade and comes just as Beijing pushes for it to be included as a reserve currency.
        The hurdles come as the yuan is going to face its biggest test yet: possible inclusion as an official reserve currency by the IMF. In May this year, the International Monetary Fund's Executive Board will conduct a review of the currencies to include in the Special Drawing Right, an international reserve asset that can supplement member countries' official reserves. Currently, its value is based on the dollar, euro, yen and sterling.
        This past weekend, China's central bank governor reiterated the world's second largest economy's credentials to International Monetary Chief Christine Lagarde, who was visiting Beijing. He said the yuan should be included in the IMF's special drawing rights.
        From a rush to set up currency swap agreements with countries in emerging and developed markets, to opening up parts of its capital markets this year, China has been on an aggressive campaign to internationalize its currency since 2008. Inclusion in the IMF's special drawing rights marking a major step in this process, reflect the increasing weight of China in the world economy and potentially chipping away at the dominance of the dollar.
        The HSBC survey of 1,610 international companies that are engaged in business with mainland Chinese companies or are a business based there with annual sales of at least $3 million though found fewer businesses now expect an increase in cross-border trade with China, as growth forecasts in the United Kingdom and France decline, pointing to lesser trade and business opportunities.
        The dip in usage also comes as major central banks across the world, barring that of the U.S., have stepped up monetary policy easing measures and sent their currencies to multiyear lows against the U.S. dollar. The yuan too posted its biggest annual loss in 2014 against the greenback after years of one-way appreciation, though it has been steadily appreciating against a basket of other currencies.
        "Corporate use of the renminbi reached a watershed last year," said Simon Cooper, chief executive of HSBC Commercial Banking in news release, referring to the currency's official name. The yuan is "maturing as a global currency; one that fluctuates in value and one for which demand can be influenced by developments outside mainland China."
        Of all the companies surveyed by HSBC this year, 54% expected to boost cross-border trade with China in the next 12 months, compared with the 59% last year. Over a quarter of firms "across all 14 markets that aren't using the RMB today said they plan to use it in the future," according to the survey. However, outside the Asia-Pacific region, "there is a slight weakening in terms of future usage intent across all markets with the exception of Germany, which marginally strengthens future usage intent."
        "This is, in fact, somewhat positive news because what it's showing is that the RMB is becoming part of the global economy. And, it's being considered vis-à-vis currencies that have been operating in global markets," said Evan Goldstein, global head of renminbi solutions at Deutsche Bank, based in Hong Kong. "What's happening today and perhaps could happen on and off through 2015, is not a testament to the commitment of [China] towards internationalizing the RMB."
        More than a fifth of all companies surveyed say they discussed using the yuan for business. But, fewer companies expect to gain from the one-way appreciation of the yuan.
        Still, recent data from payment provider Society for Worldwide Interbank Financial Telecommunications, or Swift, shows a rise in the currency's usage in global payments, trade settlement and in money market instruments, although still much below the U.S. dollar.
        Write to Anjani Trivedi at anjani.trivedi@wsj.com
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        (END) Dow Jones Newswires

        March 24, 2015 04:03 ET (08:03 GMT)

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