Renminbi trade finance: less than meets the eye

Rmbit

An apparent fresh milestone for the renminbi arrived on Tuesday, when payments tracker Swift announced that the Chinese currency had leapfrogged the euro to become the world’s second most used trade financing currency.

However, the news is unlikely to be greeted with champagne corks by those in China’s commerce ministry hoping to see the renminbi go global.

While the Swift data show that renminbi trade finance has jumped from less than 2 per cent of the global total to almost 9 per cent since January 2012, the numbers are slightly misleading. By May last year, the renminbi has already risen to 4 per cent – overtaking the yen. So the rise is more gradual than explosive.

In fact, the renminbi overtook the euro briefly in January, and again in March this year, just before the Chinese government cracked down on fake trade invoicing.

What’s more, the pace of actual trade settlement in renminbi has failed to keep up. It still accounts for just 0.8 per cent of the global total, a lower share than the Thai baht or the Swedish krona.

Source: Swift

So what does the mismatch tell us? It is most likely a sign of the same old piece of financial shuffling that has been going on for much of the past 2 years – using Letters of Credit to access higher interest rates in China itself. [This piece from the beyondbrics archives explains how it works.]

“I think it is more to do with using China as a carry trade – people want to get their money into China,” says Nick Verdi, Asia FX strategist at Barclays. “With global interest rates so low, China really is the only place where you can get such large carry. Trade finance is one of the key avenues to take advantage of that.”

The dominance of China, Hong Kong, and Singapore in the statistics for renminbi trade finance – together they make up 92 per cent of the market – seems to support the idea that this is not a true sign of the renminbi’s fast rising popularity for trade. However, that Australia and Germany each account for 2 per cent might offer a grain of solace to the renminbi cheerleaders.

Related reading:
Cities compete to be global centre of renminbi trading, FT
Four key questions on the internationalisation of the renminbi, FT
Access to markets signals Beijing’s resolve, FT
Renminbi’s mysterious rise: trade finance or interest arbitrage?, beyondbrics