In the world of global currencies, the Chinese yuan is the undrafted rookie. And that rookie is now making quite the name for himself, say fixed income analysts at London based Ashmore Group, a $70 billion emerging markets money manager.
Two years ago, the yuan was ranked 13th in the world for global payments, according to the Society for Worldwide Interbank Telecommunication, best known as SWIFT. Last November, the yuan surpassed the Aussie and Canadian dollar to become the fifth largest currency used in international trade.
“At the current pace of growth, the Chinese yuan will easily overtake the Japanese yen as the fourth most used payments currency next year and within three years challenge the pound for third place,” say Ashmore Group economists Jan Dehn and John Sfakianakis in a research note on Monday.
While Ashmore has something to sell in China — they’re one of the only foreign firms currently allowed to invest in mainland Chinese debt – there are some numbers to back up the yuan’s rise.
In December, the Chinese currency reached a record high share of 2.17% in global payments by value compared to the yen’s 2.69%.
“The (yuan) breaking into the top five world payments currencies is an important milestone” says Wim Raymaekers, head of banking markets at SWIFT. “It is a great testimony to the internationalization of the yuan and confirms its transition from an emerging to a business as usual payment currency.”
Raymaekers said that new offshore clearing centers around the world, mainly with British, Hong Kong and Australian banks, helped propel the yuan forward last year.
In percentage terms, China’s currency is growing in use more than the pound and dollar.
Global payments in the Chinese currency increased in value by 20.3% in December 2014, while the growth for payments across all currencies was 14.9%. The yuan has been showing a consistent three digit growth over the past two years with an increase in value of payments by 321%. Over the last year, yuan payments grew in value by 102% compared to an overall yearly growth for all currencies of just 4.4%, SWIFT said in a statement.
Around a thousand international financial institutions in 70 countries are settling trade in yuan. A number of banks – both Chinese and non-Chinese – are pitching for more business in yuan, with the strategic goal of generating a sizeable revenue stream. Ashmore, like other China-bound fund managers at Matthews and Guinness Atkinson, all think that the internationalization of the yuan is an potential boon for investors. China offers potential for fixed income investors, with better yield the core economies, and enough money in foreign reserves to ease bond buyers concerns that the government might miss a debt payment.
China’s yuan is not yet a global reserve currency like the yen, pound, dollar and euro. But the International Monetary Fund is reviewing the possibility in October, Ashmore said. A final decision on the matter won’t come until the end of the year. The IMF only decides on currencies’ reserve status every five years.
“We think China will strive to achieve global reserve currency status this year,” says Dehn. “The major obstacle is likely to come from developed economies that see the arrival of a new global reserve currency as a threat, because it would directly compete with their currencies for a share of global central bank reserves.”
The U.S. and Euro zone might not like the idea. Emerging markets, on the other hand, hold nearly 80% of all global foreign currency reserves. The yuan is diversification, and all of the Asian and Latin American economies are doing business with China. China’s foreign reserves are around $3 trillion. Brazil, Russia and India combined equal close to another trillion dollars.
For Ashmore, an emerging market currency bull, the central bankers of those countries have strong incentives to support China’s bid for reserve currency status at the IMF. The most obvious reason is that the U.S., Europe, Japan and the U.K. have huge debt and fiscal liabilities and have printed huge quantities of paper money to re-inflate their bubbles instead of reforming or deleveraging.
Whether or not it becomes a reserve currency, the Chinese yuan is set to outflank the British pound in the years ahead. China is in the slow process of reforming its capital markets, enticing more foreign money into China’s financial system, which will make the yuan more attractive to portfolio investors. Judging by SWIFT, the yuan is already of interest to multinationals trading with Chinese companies on a daily basis.
original source: http://www.forbes.com/sites/kenrapoza/2015/02/02/chinas-yuan-to-overtake-british-pound-by-2018/