Depreciation not seen as setback to yuan’s growing use in global payments

The yuan’s acceptance in trade settlements and cross-border payments faces short-term hiccups, but the long-term outlook remains bright, experts say.

Companies interested in tapping the yuan to finance imports or exports might be bogged down in the wake of a fixing regime change that led to the surprise devaluation of the currency last month, but only for the time being, said Biswajyoti Upadhyay, the head of greater China and North Asia product management transaction banking at Standard Chartered.

“For those who are transitioning or considering the usage of yuan in cross-border trade settlements, the process may encounter temporary delay,” he said. “Once the situation stabilises, people will continue to see value in invoicing in yuan. It is a long-term direction that will not be affected by short-term volatility.”

The yuan’s depreciation, at under 5 per cent, remained small compared to the yen and euro, so  was not significant enough to affect its  usage  in invoicing, letters of credit and other trade finance instruments, Upadhyay said.

“It will not be a problem for those who already use it, for example some large European companies which already have yuan in their corporate treasury baskets with access to the [yuan currency]  market for hedging their position,” he said.

The yuan’s share of global payments, as tracked by Swift, the interbank messaging system, hit a record high of 2.34 per cent in July, thanks to upticks in South Korea and Taiwan, as well as the setting up of new clearing centres in Taipei, Singapore, Seoul, Sydney and Kuala Lumpur, said Michael Moon, Swift’s Asia-Pacific head of payments.

At this stage, it was difficult to ascertain the impact the devaluation had had on the yuan’s usage for payments, he added.

Swift tracks documentary credits such as letters of credit, a form of bank guarantee on payments heavily used by Asian exporters. Letters of credit account for 15 per cent of global merchandise trade value, said   the Bank for International Settlements.

Separately, the Standard Chartered Renminbi Globalisation Index, which gauges the popularity of offshore yuan, rose for the first time in four months to 2,140 in July from 2,092 in June, thanks to growing cross-border yuan payments.

But the index, which covers the yuan’s use in deposits, dim sum bonds, certificates of deposit, trade settlement and other payments in seven offshore markets, risked short-term setbacks until the end of the year, at the earliest, the British lender said.

Offshore yuan (CNH) deposits were expected to contract, it said, as exporters had an incentive to sell foreign currency for more offshore yuan, whose discount with the onshore yuan was expanding. “We see upside risk to USD-CNH between now and end-2015 and expect a re-convergence between onshore and offshore spot rates to take time,” Standard Chartered said.