Chinese to start settling trade in Yuan
This comes from Marc Chandler of Brown Brothers Harriman:
China appears to be an offensive of sorts. The governor of the PBOC proposed evolving the SDR as an alternative reserve asset. China has announced CNY60 bln of swap lines with a handful or so of countries. Today China indicated that it will begin experimenting with using the yuan to settle trade. As is its habit, it will begin in a very limited way for Shanghai, and 4 cities in the Guangdong province. China did not appear to indicate which foreign trade partners the yuan settlement apply to, but Hong Kong (still considered foreign trade) and the countries that now have yuan swap lines would be the likely candidates, it seems.
The invoicing function is not often considered when many economists and analysts talk about currencies. However, it is an important function and underscores the role of the US dollar. Consider that nearly all US exports and imports are invoiced in dollars. Rounding the actual figures, only about half of the euro-zone’s exports and imports are invoiced in euros and only about a quarter of Japan’s exports and imports are invoiced in yen.
Even when the US is not a partner in the trade, the US dollar is often used as an invoicing currency. China wants the yuan to be used more and Russia wants the ruble to be used more. Wanting and having are two different things. China’s swap lines may help make the yuan, which is not convertible, more accessible, but the CNY60 bln, roughly equivalent to $95 bln is a drop in the bucket, paling in comparison to Chinese exports–it is about 6 weeks worth of Chinese exports and the depressed pace seen in Feb (exports $64.90 bln in Feb but $90.4 bln in Jan).
Although there seems to be some penchant in the media and among some analysts to play up the China challenge to the dollar, the greenback’s role seems quite secure still. Too many seem to be too willing to take China’s own spin at face value. It has allowed China to succeed in, for all practical purposes, to re-peg its currency to the dollar. It has allowed China to maintain its reliance on exports–domestic consumption accounts for a smaller share of GDP than in 2005, when the yuan’s formal peg to dollar was dropped. Also, little noticed was the news last week that in Q4 08, central banks reduced their dollar holdings in reserves by $110 bln. While central banks were selling these dollars, the greenback appreciated against most major and emerging market currencies, except the Swiss franc and Japanese yen.
China’s promotion the greater use of the yuan is a nice news item, but in terms of its own trade and global developments, it is rather small potatoes.
While this move is insignificant in terms of the amount involved, it is yet another indication that the Chinese are serious about moving away from the U.S. dollar.