Yuan trade settlement not affected by FX volatility

Reuters: The Chinese currency’s recent decline has not affected corporate appetite for the yuan in cross-border trade settlements as they can still benefit from using the currency in trade transactions, an HSBC executive said on Thursday.

“We don’t expect the percentage of yuan trade settlement in China’s total trade to fall as benefits and opportunities to use the yuan are quite clear,” Vina Cheung, global head of renminbi internationalisation in global payments and cash management at the bank, told Reuters.

For Chinese companies, they do not need to manage FX risk if they use the yuan to settle trade; while for foreign companies that have China business, they may also find synergy to use the yuan by centralising their FX management, Cheung said.

Cheung expected yuan trade settlement to account for 30% of China’s total trade in 2016-2017, rising to 50% by 2020.

The yuan has lost more than 4% against the dollar in the past year and the market consensus is that it will continue to fall this year.

Median forecasts from a Reuters poll of 65 strategists expect the yuan to ease to 6.58 per dollar by end-June and 6.70 by end-March in 2017, about 3% weaker from 6.47 on Thursday.

Despite concerns about China’s cooling economy and weak currency, yuan cross-border trade settlement still grew in 2015, rising to 26% of the country’s total trade from 22% a year earlier, according to Reuters calculations.

In addition to a genuine corporate need to include the “redback” in business operations, analysts say arbitrage activities arising from different interest rates and FX rates in mainland China and Hong Kong also play a role.

The Chinese currency remained the fifth most active currency for global payments by value with a share of 1.76% in February, according to global transaction services organisation SWIFT.