The Dollar And Yuan: No Contest…Yet

James Kynge writing in the Financial Times in early June (June 6, “US warming to the redback from China trade”) that “China’s renminbi is rapidly displacing the dollar as a trading currency not only in Asia and Europe but now also in the US home market.” Many observes seem to agree.  Yet the data he cited and subsequent data does not support such a claim.

The yuan’s share of settlement of US China/HK trade is 2.4%, Kynge acknowledges. The 327% surge the journalist called this is the misleading result of taking a percentage of a percent (it was 0.7% March). 

Kynge also cited the rise of the yuan usage of trade settlement according the SWIFT. Yet there has been no displacement of the dollar. In March the dollar’s share stood at 40.17%, and data released today showed that in June the dollar’s share 41.89%. In January of 2012, it stood at 29.71%. 

Let’s be clear, the yuan’s share of global settlement accounting to SWIFT for June 2014 was 1.55%. While this represents an increase from 0.63% a year ago and 0.25% at the start of 2012, to call this a “rapid displacement” as Kynge did is an exaggeration that distorts the facts beyond recognition. The decline in the share accounted for by the euro, Swiss franc and Australian dollar’s share means that a better case can be made for the yuan displacing other currencies, but even that can only be fairly characterized as marginal at best.  Between January 2012 and June 2014, the euro’s share has slumped from 44.04% to 31.25%, for example.  

Many observers neglect another dimension of the modest rise in the yuan’s usage: that the modest use of the yuan was not so much a symptom of the internationalization of the RMB, but a financial arbitrage play. As the Peterson Institute for International Economics has shown, when the off-shore yuan (CNH) trades a premium to the onshore yuan (CNY), Chinese importer are incentivized to pay for imports offshore. The magnitude of the CNH premium appears to drive the rise in the offshore yuan supply. They project that 100 bp premium translates into an 80 bln increase in CNH deposits.