As China drives intra-Asian trade and economic expansion, trade settlement in its currency is gaining momentum globally.
Stronger domestic consumption and intra-regional trade have emerged as two major drivers of economic growth in Asia. China’s large role in regional growth has led to increasing acceptance of the renminbi (RMB) in trade settlement, and it could one day become a regional currency, says HSBC.
“The outlook for Asian trade is positive. HSBC forecasts that trade in the region will grow at an average of 5.4% annually from now until 2016. Additionally, between now and 2026, trade in Asia will grow as much as 129%, outpacing global trade growth of 98%,” said Huynh Buu Quang, the bank’s head of global trade and receivables finance for Asia-Pacific.
Intra-regional trade currently accounts for 50% of all trade in Asia Pacific, which is also seeing its share rise rapidly with other emerging markets, Brazil in particular, he said.
In 1990, trade in Asia was only about 8% of the global total. By 2010 the figure had reached 18%, and HSBC forecasts it will reach 39% by 2030, spurred by rising household incomes and domestic demand.
“Trade in Asia, including Asean, is expected grow fast despite the uncertainty we see in Europe and the United States,” Mr Quang said during a recent briefing in Bangkok. “China will continue to play its central role and yuan settlement will be gaining more momentum throughout the region.”
The global use of the yuan as a trade settlement currency is clearly on the rise, and offshore payments are increasingly taking place outside Hong Kong. China’s total international trade last year was worth US$3.5 trillion and about 10% was settled in renminbi.
Mr Quang said that more and more Chinese companies were using the renminbi to manage foreign-exchange risk rather than to speculate, adding that in his opinion this was the right behaviour.
HSBC believes the change underlines widespread confidence among Chinese enterprises in the future of the yuan as a major global currency.
The Renminbi Globalisation Index, a measure of yuan-based business activity worldwide, showed a seven-fold increase in yuan internationalisation between December 2010 and September 2012. Chinese traders usually offer discounts of 3% or more on goods when deals are settled in renminbi in order to help their trade counterparts to manage foreign-exchange risk.
Given China’s size and the extent of its trade, the results of its effort to internationalise its currency are not unexpected, said Dr Aksornsri Phanishsarn, director of the Economic Research and Training Centre at Thammasat University.
However, she is certain that the renminbi will not replace the US dollar anytime soon, adding that the best China could achieve would be a currency choice on par with the yen or euro.
“Ideally speaking, if you want to turn a currency into a global one it has to have an important characteristic, which would be no capital controls,” she said. “The lack of convertibility of the yuan still remains the main barrier as there is no instrument to hedge against forex risk if trade counterparts hold yuan overseas.”
Dr Aksornsri noted that China had now become the No. 1 trading partner with Asean, followed by the United States, Japan and Europe. It is also Japan’s biggest trading partner in both exports and imports. Moreover, China is the largest export market and the second-largest destination of direct investment for South Korea.
The world’s second-largest economy is now involved in negotiations with Asean and others to create a 16-nation trade bloc, the Regional Comprehensive Economic Partnership (RCEP), which expected to further strengthen its leading role.
“It is obvious that the role of China in trading relationships in the region will increase significantly, particularly with emerging economies at a time when developed countries are slowing down,” said Dr Aksornsri.
“There is no doubt that the demand for China’s exports in the region will continue to grow rapidly over the next 20 years, and the fact that China is turning toward a consumption-led economy also cannot be ignored.”