Global enthusiasm for yuan overstated
A closer look at the data reveals real share of China’s goods trade settled in yuan is just 3 to 4pc
It may have slipped your notice, but Beijing's drive to internationalise the yuan is very nearly 10 years old.
It was back at the beginning of 2004 that the mainland authorities first gave the nod to yuan-denominated bank accounts in Hong Kong. If you were to judge by the headlines, you would get the impression that since then the currency has taken the world by storm.
Last month, the value of deposits in Hong Kong leapt to a record 782 billion yuan (HK$992 billion).
According to transaction services company Swift, the yuan's share of global trade finance has shot up 357 per cent since the beginning of last year, overtaking the euro.
And according to customs data, China, the world's biggest exporter, settled an impressive 15 per cent of its foreign trade in goods in yuan in November.
Dig a little deeper into the data, however, and all is not as it first appears.
Take those yuan deposits in Hong Kong, which make up more than 70 per cent of all offshore yuan accounts. The amount sounds huge, although it is just 11 per cent of the city's deposit base. What's more, 90 per cent is held by locals and mainland firms. Just 10 per cent is held by firms based outside Hong Kong or the mainland, which hardly indicates massive global enthusiasm for the yuan.
Then there is that figure for the proportion of the mainland's foreign trade settled in the currency. Look back over the previous 12 months and the share is actually 11 per cent.
As Goldman Sachs economist M.K. Tang points out, that's relatively low by the standards of other big, and even medium-sized, economies. Britain, for example, settles more than 40 per cent of its overseas trade in pounds, while Australia manages to settle almost 30 per cent of its commerce in local currency.
But even that 11 per cent figure heavily overstates the true level of the mainland's foreign trade settled in yuan. That's because if you look more closely at the breakdown of the mainland's imports by origin, you find that the third-biggest exporter of goods to the country, behind South Korea and Japan, is … the mainland itself.
Altogether over the 12 months to October, customs data shows the mainland imported US$159 billion worth of goods from itself. That's more than it imported from either Taiwan or the United States.
This isn't so surprising. It often makes sound commercial sense for components manufactured in, say, Shanghai and destined for assembly plants in Shenzhen to be transshipped through Hong Kong. What's more, the tax advantages can be compelling.
Naturally, these shipments are invoiced and settled in yuan, and so both legs of the deal - export and import - show up in the statistics as cross-border trade settled in yuan.
If you want to get an impression of how widely the yuan is really used in international trade, you need to double-count these transshipments, adjust them for the 15 per cent or so of value they miraculously acquire by passing through Hong Kong, and then strip them out of the trade settlement data published by the People's Bank of China.
Do all that, and the figure you get for the real share of the mainland's goods trade settled in yuan comes to somewhere between 3 and 4 per cent.
In other words, despite all the hyperbole about yuan internationalisation, after 10 years the currency is still struggling to make real headway in global markets.