Chinese currency renminbi (RMB), or the yuan, has gained bigger popularity overseas, especially in countries along the Belt and Road as the B&R construction advances smoothly. The use of Chinese currency sees a huge development potential in the B&R countries with further rise of cross-border trade, which can be settled in RMB since 2009.
According to data released by China’s central bank, the People’s Bank of China (PBOC), 3.71 trillion yuan worth of cross-border trade was settled in RMB in the first three quarters of 2018, and a growing number of countries and regions have accepted the settlement of cross-border transactions in RMB.
International demand for RMB is increasing. The thirst for RMB may be found in the booming currency swap between China and foreign countries and hot selling of Panda bonds in B&R countries.
Frequent Currency Swaps Mirror a Rising Popularity of RMB in B&R Countries
On December 10, the central banks of China and Ukraine renewed a reciprocal currency swap agreement allowing the exchange of local currencies between the two central banks for up to 15 billion yuan, or 62 billion hryvnias (about 2.17 billion U.S. dollars) for three years.
It is the latest currency swap agreement the PBOC signed or renewed in 2018. Since the beginning of 2018, a lot of B&R countries have extended currency swap deals with China. They included Albania, South Africa, Belarus, Pakistan, Kazakhstan, Malaysia, Argentina, England, Indonesia and Chile. In addition, Nigeria inked a new currency swap deal with China. So far, China has launched bilateral currency swaps with over 30 countries and regions in total, most of which are B&R countries.
Behind the large number of currency swap agreements is the rising demand for RMB in the B&R countries. Bilateral currency swap between RMB and currencies of other countries can help hedge against the uncertainty risks on the international financial market, and facilitate bilateral trade and investment to boost the economic development of both countries.
Customs statistics show that China’s foreign trade with countries along the Belt and Road surged 14.4 percent year on year in the first 11 months of 2018, 3.3 percentage points higher than the overall trade growth, with cross-border e-commerce keeping fast growth.
Zhengzhou Yutong Bus Co., Ltd., a global leading bus manufacturer, has witnessed quick expansion of its overseas business under the Belt and Road Initiative. Chang Hao, an executive with the company’s overseas marketing sector, pointed out that using RMB as a settlement currency had facilitated the bus trade. In 2017, an African client of Yutong made a big bus order but the client couldn’t obtain enough U.S. dollars for the big deal. Yutong Bus, through coordinating with several domestic and overseas financial institutions, helped the clients conclude the transaction in RMB.
Huang Zhilong, a senior analyst with Suning Institute of Finance, pointed out that during the Belt and Road cooperation which covers a wide range of business including trade, investment, financial cooperation and project contracting, the international application of RMB emerged in three forms, that is, signing currency swap agreements with countries along the Belt and Road to form a RMB clearing system; growing use of RMB for trade and investment settlements; establishing multilateral financial institutions such as Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund which have a considerable portion of business settled in RMB.
The Belt and Road cooperation brought RMB to more “international scenes” and it is steadily driving the internalization progress of yuan.
Rising Needs for RMB Finance Products along B&R
Apart from the demand for trade and investment settlements in RMB, the needs for diversified RMB finance products and related management are rising among various institutions, enterprises and individuals along the routes.
Panda bonds, yuan-denominated debts sold by foreign countries and overseas agencies in China, is an important approach for foreign countries to obtain the Chinese currency. The amount of Panda bonds issued on the interbank market surged from about 15 billion yuan in 2015 to over 60 billion yuan in 2017. Foreign countries, especially those along the Belt and Road routes showed a high enthusiasm for issuing Panda bonds to raise RMB capital and support Belt and Road-related projects.
On December 17, Hungary sold two billion yuan in Panda bonds targeted at the domestic Chinese market, which has been the second time for the country to issue the RMB bonds and Hungary has thus become the first sovereign European issuer to return China’s interbank market.
The three-year bond, actively subscribed by domestic and foreign investors, carries a 4.3-percent coupon and the issue was oversubscribed 1.725 times. Overseas subscriptions totaled 390 million yuan.
The capital raised will be used as general funds of the issuer and can be utilized to support the Belt and Road projects, according to Bank of China, co-lead underwriter and lead book runner of the 2-bln bond issuance.
In March of 2018, the Philippines issued its inaugural 1.46 billion Chinese yuan (230 million U.S. dollars) of Panda bonds in China. The bonds, with a three-year tenor, were warmly received by the Chinese and other offshore markets with over-subscription hitting about 6.3 times.
BRI to Further Advance Yuan Internalisation
Boosted by the Belt and Road construction, the yuan is gaining more global recognition. Currently, more than 60 central banks or monetary authorities have included RMB into their forex reserves. According to a SWIFT report, the yuan’s share in global payments stood at 1.7 percent in October, the sixth most-traded currency on the platform. Official data shows overseas investors held 1.75 trillion yuan of Chinese bonds by the end of August 2018, 54 percent higher than a year ago and up for 18 months in a row.
Zhang Liqin, a senior analyst with Central University of Finance and Economics, noted that there is still huge space for RMB receipts and payments in the trade and investment along the Belt and Road routes. The RMB may become the most commonly used infrastructure investment and financing currency; RMB internationalisation can obtain considerable progress from the financial businesses carried out along the routes.
In the near future, China may focus on accelerating the signing of currency swap agreements with countries along the Belt and Road, where there are widespread problems such as insufficient foreign exchange reserves and fragile financial systems, predicted Huang Zhilong, senior analyst with Suning Institute of Finance, adding that signing RMB swap agreements with China will help these countries cushion external financial shocks.