Three Kinds of Nations Embracing the Chinese Yuan

It's no big secret that the US dollar has been on something of a roll lately. With economic growth Stateside powering ahead of the likes of Japanese, European and even South American economies, the expectations are for the Federal Reserve to raise interest rates in the near future to stave off possible inflation. I for one don't think inflationary pressures are strong in the US with falling energy costs, non-existent wage growth and so on, but currency market movers and shakers apparently think otherwise.

That said, countries around the world are not waiting around and sticking with the US dollar en masse. Those hedging their bets in managing their currencies come in different flavors. First, there is the America-loathing group that would not want to hold their enemy's currency. There is, after all, a visceral dislike of all things American in certain parts of the world. Witness Russia receiving payment for an ever-larger share of its oil exports to China in renminbi:

In an interview with the Russian news agency Tass, Mr. Putin said that oil giant Rosneft is working with a major Chinese corporation to receive renminbi as a payments for a significant flow of oil. “We’re moving away from the diktat of the market that denominates all the commercial oil flows in U.S. dollars,” Mr. Putin said. Russian companies are increasingly shifting to direct renminbi-ruble trading to settle their imports and exports with Asia.

Turnover in direct transactions in the two currencies soared to $1.2 billion over the course of October, from $307 million in September and as low as $52 million in July, according to data available on the website of the China Foreign Exchange Trading System, the trading division of China’s central bank.

Another group of countries are China's near-neighbors in the Asia-Pacific seeing how the wind is blowing in the world economy and adjusting accordingly. In this group you have South Korea, which has aspirations to be another offshore center for yuan. This would be particularly useful for trade settlement:

Jung Eunbo, Korea’s deputy finance minister, said increasing the use of yuan for trade settlement will reduce transaction costs for local exporters. Currently 85% of Korea’s trade is settled in U.S. dollars. That means exporters need to sell yuan for dollars before turning them into Korean won.

Mr. Jung, in an interview, acknowledged that greater use of the yuan in Korea also would reduce appreciation pressures on the won. That’s because Korea over time hopes to develop a deep offshore market for yuan-denominated bonds and other financial instruments. Then Korean exporters won’t need to convert their overseas earnings into won at all.

The last group of countries are US-friendly Western nations who nonetheless see benefits in trading yuan to gain an advantage over more China-phobic countries. Witness Canada looking to get a head start over the US in North America:

Bank of Montreal and HSBC Holdings Plc are among banks that stand to benefit from Canada’s designation as the latest nation to host a trading hub for China’s currency. China on Nov. 8 gave Canada a 50 billion yuan ($7.9 billion) quota under the Renminbi Qualified Foreign Institutional Investor program as Prime Minister Stephen Harpervisited Beijing.

China’s State Council also approved a three-year, C$30 billion ($26 billion) currency swap agreement with the country, while the Chinese central bank appointed Industrial and Commercial Bank of China to clear renminbi transactions in Canada. Countries around the world are bidding to establish trading centers for the yuan, which surpassed the euro last year to become the most widely used currency in trade finance after the U.S. dollar.

Unlike commonly traded currencies, critics of capitalism will be glad to note that RMB are mostly used to settle actual trade transactions. Recall, after all, that the yuan is now the second most-widely used currency for settling trade after overtaking the euro in 2013:

China’s yuan overtook the euro to become the second-most used currency in global trade finance after the dollar [in 2013], according to the Society for Worldwide Interbank Financial Telecommunication. The currency had an 8.66 percent share of letters of credit and collections in October [2013], compared with 6.64 percent for the euro, Swift said in a statement today. China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance, according to the Belgium-based financial-messaging platform.