New | Chinese yuan snatches No. 4 spot in global settlement from Japan's currency, Swift says
Jump from 12th place won't keep Beijing from letting currency soften further, analysts predict
China's currency has snatched the world's No4 spot in global payment value from Japan, according to Swift, but analysts still expect Beijing to allow the yuan to depreciate against competing currencies in the coming months.
The yuan grabbed a 2.79 per cent share of world payment value in August, financial services provider Swift said yesterday, up from just 0.84 per cent three years earlier, or No12 globally. The yen's share of the market was three basis points lower at 2.76 per cent in August, trailing the yuan for the first time ever.
The US dollar still captures 44.82 per cent of the market, the euro 27.2 per cent and the British pound 8.46 per cent.
August also marked the first time that more than 1 million transactions had been conducted in yuan, 50 per cent growth on the same month last year.
The number of transactions is unlikely to fall but the value of those transactions could be weakened if the yuan continues to depreciate. Several analysts expect that it will.
Nomura's foreign exchange strategist Craig Chan projected the spot onshore yuan rate to peak at 6.70 in December 2015 before settling at around 6.60 at the end of the year. The yuan traded at 6.36 to the US dollar yesterday afternoon, down from 6.21 in early August.
The view was echoed by Societe Generale China economist Wei Yao, who said Beijing would tolerate a softening yuan despite it causing capital flight and a record slump in the country's foreign exchange reserves.
"Ruling out the scenario of the People's Bank of China giving up the reform altogether, we think that the most likely near-term strategy of Chinese policymakers is to allow more yuan depreciation to limit further appreciation in trade-weighted terms, in a largely controlled manner," Yao wrote in a note to clients.
Hong Kong Exchanges and Clearing's China economist Ba Shusong noted last month that the sudden 2 per cent devaluation of the yuan on August 11 should be seen as correcting anomalies in the mechanism that determined the value of the yuan against a basket of other currencies. He noted that since 2013, the yuan-dollar exchange rate had basically been stable, which meant the effective exchange rate of the yuan had risen by nearly 20 per cent.
Changyong Rhee, director of the Asia Pacific department of the International Monetary Fund, writing in a blog post on Monday, urged that the declines in the value of China's currency since August be viewed in context of the currency's dramatic rise in tandem with the US dollar.
"Following a significant real appreciation over the past year, the yuan has only depreciated by around 3 per cent since the change. This does not alter the IMF's assessment that the exchange rate is broadly in line with medium-term fundamentals," Rhee wrote.
The rise of the yuan over the past year comes against a backdrop of slow global growth and a declining market for payments.
While yuan payments increased in value by 9.13 per cent from last year, the value of total global payments tracked by Swift decreased by 8.3 per cent.
This year, the yuan has also become the No1 currency for inter-regional payments with China and Hong Kong.
As China launches its own global payments system for yuan transactions this week, hopes are high that the currency will help drive regional trade during a period of economic sluggishness.
