Yuan set to globalize further with more reforms

In 2013, China continued to promote the internationalization of the yuan, or renminbi, with media and analysts buzzing about the effect of recent reforms on the increasingly global currency.

The country made progress in facilitating yuan-denominated international trade and investment, developing yuan offshore businesses, and establishing more currency swap lines and other financial agreements.

Financial reform measures announced in the last two months by China, especially a 30-point guideline issued by the central bank to support the country's first free trade zone in Shanghai, are set to help speed up yuan internationalization.

Media outlets worldwide hyped the news that the yuan had overtaken the euro and become the second-most used currency in global trade finance. Of much more significance, however, are figures related to actual trade settlement in yuan.

According to global transaction services organization SWIFT, the yuan remained the 12th payments currency in the world, with a mere 0.84 percent share of all global payments in October, even lower than the Thai baht and Swedish krona.

In comparison, the US dollar and the euro accounted for 38.1 percent and 34.7 percent of all global payments, respectively, followed by 9.9 percent for the British pound.

China is the world's second-largest economy after the US. It is the world's largest exporter and second-largest importer of goods. The international use of the yuan is not at all commensurate with the importance of China's economic status.

The internationalization of the yuan, by definition, is the process of promoting its use outside of the Chinese mainland.

According to HSBC chief China economist Qu Hongbin, an internationalized currency means a currency that is widely accepted for investment, as a financing and payment vehicle and as a reserve, intervention and anchor currency in all countries across the world.

Sovereign currencies usually enter the global market only after the opening of the country's capital account.

However, China has been trying to introduce the yuan into the global market in an unprecedented fashion. It has been pushing the yuan into the overseas market through cross-border trade settlement since June 2009, as its capital account is largely closed.

Three-pronged approach

Since 2009, China has promoted yuan internationalization with a three-pronged approach: facilitating international trade and investment denominated and settled in yuan, encouraging offshore yuan services centers to develop offshore yuan-denominated financial products, and encouraging central banks to hold yuan as part of their foreign exchange reserves.

"The currency's stable valuation and steady appreciation are encouraging investors to include more yuan products in their portfolios," Diana Cesar, head of retail banking and wealth management at HSBC in Hong Kong, wrote in an article earlier this month.

With the wider use of the yuan in international trade and investment activities, demand for yuan financial services from overseas individuals and corporations has increased gradually.

"This attracts overseas financial centers to promote their yuan business. There are now multiple offshore yuan centers around the world, including Hong Kong, London, Singapore and Taiwan," said a report titled "Offshore Renminbi Center" released on December 12 by the Research Office under the Legislative Council of Hong Kong.

Hong Kong, which started its offshore yuan business in February 2004, is the first mover in offshore yuan business and the world's largest offshore yuan center.

In 2013, Singapore and Taiwan started their offshore yuan business. Singapore aims to serve ASEAN countries, and its yuan customer deposits had reached 140 billion yuan (US$23 billion) by July 2013. Taiwan is handling cross-Strait trade and financial transactions. Its yuan deposits rose to 123 billion yuan at the end of October.

In October, Hong Kong's yuan deposits saw their biggest rise since April 2011 to hit a record high of 781.6 billion yuan, according to the Hong Kong Monetary Authority.

Offshore yuan deposits grow

The growth in offshore yuan deposits, especially in Hong Kong and Taiwan, helped the Standard Chartered Renminbi Globalization Index (RGI) to rise 2.4 percent to 1,220 in October from September, the bank said in its latest index update.

The RGI, which stood at 809 in January 2013, is an index that measures the internationalization of the offshore yuan across markets. The bank said it is the first industry benchmark to track the progress of yuan business activity.

Standard Chartered launched the RGI in November 2012. The RGI's base value is 100, set for December 31, 2010. The index now covers the top four markets in offshore yuan business: Hong Kong, London, Taiwan, and Singapore.

The index measures business growth in four key areas: deposits, bonds and certificate of deposits, trade settlement and other international payments, and foreign exchange.

As for cross-border yuan trade settlement, yuan settlements for trade of goods reached 4.05 trillion yuan in the first 11 months, the People's Bank of China said in a statement. It represented 17.2 percent of China's total trade in that period, higher than the 14.7 percent for the first half of this year.

As comparison, China's trade settled in yuan totaled 506.3 billion yuan in 2010, 2.08 trillion yuan in 2011, and 2.94 trillion yuan for 2012.

Cross-border yuan transactions have been conducted in 220 countries and regions, said Xing Yujing, a senior PBOC official. China had also signed currency swap agreements with 23 countries and regions by the end of September.

In October, the PBOC and the European Central Bank signed a 350 billion-yuan currency swap agreement, bringing the total volume of currency swap deals to 2.2 trillion yuan, according to Xing.

As Hong Kong, London, Singapore and Taiwan compete with each other for offshore yuan business, Chinese authorities have unveiled a slew of major financial reform measures since last month.

A reform blueprint, unveiled on November 15 after a key meeting of the Communist Party of China Central Committee, addressed all of the key financial reforms that the market has long been expecting, said Qu of HSBC in a note.

Key reform measures include accelerating interest rate liberalization, reforming the yuan exchange rate regime, speeding up yuan capital account convertibility by promoting the two-way opening up of capital markets, and the easing of restrictions on cross-border capital and financial transactions.

On December 2, the PBOC unveiled a guideline of 30 points on financial measures for Shanghai's free trade zone.