The renminbi deserves its place in regional treasury centres

The Chinese renminbi has gained traction in the global markets in recent years. The renminbi ranked as the fifth most used currency in global settlement, according to the report from SWIFT published in July 2023. That was up from eighth in 2019, surpassing both the Australian dollar and Canadian dollar in the process.¹

This growth reflects China’s growing economic influence, as well as an increasing willingness among its trading partners to settle transactions in a currency other than US dollars. While capital controls remain a limiting factor, deepening offshore renminbi liquidity is making it easier for companies to consider adding China’s currency to their treasury toolkit. 

As China moves up the value chain, continuing its transformation from the world’s factory into a major purchaser of global goods and services, its ability to set the terms of trade will also increase. Global companies with operations in Chinese mainland would do well to prepare for this shift. 

A strategic push

China has been actively promoting greater international use of the renminbi since the first moves to develop an offshore market in 2007, but there is still a long way to go. IMF researchers wrote in a March 2023 working paper that the renminbi accounts for just 2% of global cross-border transactions, far behind the country’s 18%-plus share of global GDP.²  

Recent policy moves are having an impact, though.

China has taken material steps to streamline and facilitate the use of renminbi in international trade settlements. These include preferential terms for trading partners if they use renminbi, such as reduced documentation requirements. 

Commodities are a natural focal point, given that China is the world’s biggest importer of raw materials including oil and iron ore. Saudi Arabia’s willingness to consider accepting some oil payments in renminbi has been a high-profile example, although “petroyuan” payments have not happened yet.³ In March, Brazil also announced an agreement with China that bilateral trade will be settled in the two countries’ own currencies, rather than the US dollar, while China’s national oil company, CNOOC, completed the first Liquefied Natural Gas (LNG) trade settled in renminbi, with France’s TotalEnergies.⁴ Looking ahead, there is real potential for the renminbi’s role in commodities to expand as China’s buying power increases.  

Domestic and international banks have also been incentivised to do more business across borders in renminbi. Regulators ask that Chinese financial institutions report their numbers for cross-border settlements in yuan, for example.

Other official efforts to drive this cross-border business are also underway, with branches of Chinese and international banks in various financial centres nominated as market-makers for the offshore renminbi (CNH).

Increasing corporate activity

Beyond government-led drivers, macro conditions are also encouraging international businesses to use the renminbi more.

China’s stable foreign exchange regime and independent monetary policy provide a strong foundation for companies to transact more in renminbi. At the same time, there are questions about the long-term appeal of the US dollar after the latest round of debt ceiling brinkmanship and ongoing interest rate volatility.

There has been an improvement in offshore renminbi liquidity in recent years, which in turn enables more companies to use the currency for cross-border transactions. The creation of authorised yuan clearing houses overseas and the growth of offshore renminbi derivative markets have been especially important in this regard. 

The introduction of cross-border cash pooling in a pilot programme in 2021 has allowed multinationals to simplify their cash management operations by integrating renminbi funds and transferring them between their domestic and foreign subsidiaries. The pilot has since been expanded to include a quota system for cross-border transfers, removing the need for individual approvals and giving eligible multinational companies greater flexibility.⁵  

Many of our major multinational clients have already taken advantage of these rule changes to integrate their China operations in offshore corporate treasury centres, securing efficiency gains by centralising payments, hedging and risk management activities across multiple currencies. 

As the cash pooling pilot expands, we expect more companies to adopt a similar model for their renminbi assets and liabilities. It’s one of the main reasons why we expect the use of the currency to increase – especially in Asia, where China dominates regional trade. 

Growth potential 

Cross-border treasury operations also activate the foreign exchange and overseas derivatives markets, in turn boosting liquidity and improving the appeal of the renminbi for other users. Hedging is becoming easier and more efficient as offshore liquidity deepens. And although the appeal of renminbi assets has fallen as a result of rising interest rates in the US and Europe, it may make more sense for companies to maintain a renminbi balance in the future as the comparative yield gap between the renminbi and the US dollar or euro is likely to narrow over time. 

Looking further ahead, major structural shifts are underway.

The development of infrastructure to facilitate greater internationalisation is gathering momentum. The renminbi-based Cross-Border Interbank Payment System (CIPS) has gradually matured since it was launched in 2015, and now includes around 160 countries. China’s central bank and international payments messaging network SWIFT are also collaborating on the Cross-border Financial Information Services (CCFIS) joint venture to further promote renminbi cross-border development. 

Potentially the most significant change is yet to come. China is ahead of the curve in the development of a central bank digital currency (CBDC), and the internationalisation of the digital yuan, or e-CNY, could be transformative for global trade. The mBridge project, supported by China, the Hong Kong Special Administrative Region, Thailand and others, is the largest cross-border CBDC initiative, and the e-CNY is years ahead of other major CBDCs.  In the long term, the aggregation of information from government departments such as tax bureau, custom and SAFE, together with the ability to monitor cross-border flows in real time thanks to rich information contained in e-CNY, could provide a path for China to lower or even remove capital controls.

This would, of course, be a game changer for global currencies. But even with capital controls still in place, the growing use of the renminbi in international trade and cash management shows that the currency is already capable of delivering significant benefits right now.

<sub>1. BIS, link
2. IMF, link
3. https://www.reuters.com/world/saudi-arabia-gathers-chinas-xi-with-arab-leaders-new-era-ties-2022-12-09/ 
4. https://www.asiafinancial.com/china-settles-first-lng-trade-in-yuan-in-latest-hit-to-dollar
5. http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4888289/index.html 
6. BIS, link</sub>