As reported by banking giant Goldman Sachs, the Chinese yuan has achieved a significant milestone by surpassing the US dollar in China’s cross-border payments for the first time in history. According to data from China’s State Administration of Foreign Exchange (SAFE), the yuan’s share of cross-border settlements reached an all-time high in March, primarily driven by increased foreign trading of renminbi assets.
Goldman Sachs highlights that China has made remarkable progress in functioning as a medium of exchange in global markets and has gained market share. However, the report notes that the yuan is not yet fully competing with the dollar in several aspects. While China’s importance in global goods, services, and financial markets is growing, the country still maintains capital controls, and the renminbi is not entirely freely tradable, limiting its progress as a “store of value” and “unit of account.”
The US dollar remains the dominant currency in international payments, accounting for 43% in May, according to SWIFT. The euro and British pound also play significant roles, with 32% and 7% of international payments, respectively, and the Japanese yen at 3.2%.
Goldman Sachs attributes the yuan’s rise in cross-border payments to portfolio investments linked to China’s domestic stock and bond market. Furthermore, Hong Kong, as an “offshore center for renminbi,” is witnessing an increase in yuan-based trading.
However, the Chinese currency still faces challenges in becoming a store of value internationally. According to Bank for International Settlements data, renminbi-denominated debt securities in international bond markets currently account for only around 0.7%, although this is an improvement from 0.4% a decade ago. Similarly, global reserves denominated in China’s currency makeup around 3%, up from 1% in 2016, but remain relatively low in absolute levels.
Despite these limitations, Hong Kong offers a wide range of renminbi-denominated assets for global investors, including bonds, investment funds, commodity-linked products, ETFs, real estate investment trusts, equities, and insurance products.
As the yuan’s role in international finance continues to evolve, China’s ongoing efforts to enhance the currency’s internationalization and market accessibility will play a crucial role in determining its global standing in the future.