It is all set for a global currency war in 2019.
The western currencies such as US dollar, British pound sterling, and European Union’s euro have been dominating the international trade between the world economies. But now the Chinese renminbi or yuan is making inroads in the global trade.
Chinese currency – renminbi (RNB) or the yuan – has garnered a tremendous upturn in the international trade between the global economies, especially in the countries tied with China’s Belt and Road Initiative (BRI).
In the first nine month of 2018, 3.7 trillion yuan (about $54 billion) worth of international trade has been settled between among several countries and regions – Xinhua said citing data released by the People’s Bank of China (PBOC).
The demand of RNB is increasing due to the booming currency swap between China and foreign countries as well as rise of popularization of PBOC’s yuan-dominated structured notes product linked with the bonds – also known as Panda Bonds.
Panda Bonds is a debt which is sold by foreign countries and overseas agencies in China to borrow Chinese currency. The amount of Panda bonds on the interbank market has risen from 15 billion yuan in 2015 to over 60 billion yuan in 2017.
Philippines issued its maiden Panda Bonds valued at 1.46 billion of Chinese yuan or $230 million in China with a tenor of three years. The bonds were cordially greeted by the Chinese and other offshore markets.
In last December, Hungary became the first sovereign European issuer to return for the second time to China’s interbank market – issuing two billion yuan of Panda Bonds in the domestic market of China.
Same month, the central banks of China and Ukraine also renewed a reciprocal currency swap agreement for exchange of currencies between the two countries for up to 15 billion yuan or about $2.2 billion over a period of three years.
On December 27, Pakistan also approved the launch of Panda Bonds in the Chinese market for the first time in the history of the country. Up to a value of 3.5 billion yuan, the decision aims to strengthen fast-dwindling foreign exchange reserves.
Nigeria is another country that has inked a new currency swap agreement with China. So far, China has signed bilateral currency swap agreements with more than 30 countries and regions, most of which are BRI countries.
Since the start of 2018, a number BRI-countries have reached out to China for currency swap deals. They include Albania, Argentina, Belarus, Chile, England, Indonesia, Kazakhstan, Malaysia, Pakistan, and South Africa.
China customs statistics showed that the country’s foreign trade with the BRI countries has increased by 14.4% in the first eleven months of 2018 year over year – 3.3 percentage points more than the overall trade growth.
Yuan is quickly internationalizing.
Previously, HSBC and Standard Chartered were the only two banks authorized to underwrite Panda Bonds to the foreign issuers. On December 10, PNS Paribas became the third foreign bank to underwriting the bonds under Type-B license.
The construction under the BRI is greatly supplementing the yuan globalization. Due to this mega infrastructure project, more than 60 central banks and monetary institutions have included yuan in their foreign reserves.
According to IMF, Chinese outstanding bonds were valued at $11 trillion by 2017 – five times of Korea and third highest with Japan, though behind the United States (41 trillion) and Euro area ($20 trillion).
Official data showed that overseas investors held 1.75 trillion yuan ($260 billion) at the end August 2018 – which is 54% higher than a year earlier and up for eighteen months in a row.
However, the share of yuan in global payments is very low – 1.8% – at the close Q3-2018 but it is slowly picking up and is now the sixth-largest traded currency in the world, according to IMF’s COFER.