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Appetite for yuan weakens as appreciation ends

Publication Date : 28-03-2014

 

Global enthusiasm for yuan-denominated transactions experienced a rare decline in February as the currency's decade-long appreciation came to a halt, and volatility picked up.

The Society for Worldwide Interbank Financial Telecommunication said on Wednesday that the yuan fell one spot to eighth place in the ranking of its most actively traded global payment currencies.

Yuan payments decreased 8.5 per cent month-on-month, SWIFT said. The agency attributed the slide to the Lunar New Year, which took five working days out of the month.

The yuan's market share in global payment currencies increased to a new high of 1.42 per cent in February. But that was 0.03 percentage point less than the Swiss franc, which it overtook in January.

The yuan's ranking has been increasing steadily over the past few years, the result of China's efforts to internationalise the currency and increase its global use to reflect the nation's growing economic power.

Appetite for yuan weakens as appreciation ends

While there is some convenience for companies to choose the yuan over the US dollar in their China-related activities, the return provided by the yuan's steady appreciation had given them an additional incentive to hold the currency.

But the incentive faded as the yuan's recent slump shattered expectations of one-way appreciation. The yuan has weakened by about 2 per cent since January, after strengthening more than 40 per cent since 2005, when China last reformed its foreign exchange regime.

Earlier this month, the People's Bank of China (the central bank) doubled the daily trading band to 2 per cent around the daily reference rate, in a move to promote two-way movement before making the yuan a free-floating currency. That further weakened expectations for a stronger yuan.

On Thursday, the yuan closed 0.06 per cent lower than Wednesday at 6.2130, amid a 0.04 per cent drop in the daily reference rate to 6.1465.

Gao Ting, UBS Securities AG's chief China strategist, told reporters on Wednesday that the yuan's depreciation is temporary.

"The yuan will stabilise after a while. There are no fundamentals to support a sustained depreciation," said Gao.

UBS has forecast that the yuan will trade at 6.1 at the end of this year.

According to SWIFT, yuan payments surged in Australia in February, rising 248 per cent from a year earlier and placing Australia sixth for yuan payments by value. That ranking excludes the Chinese mainland and the Hong Kong Special Administrative Region.

In February, 14.2 per cent of payments between Australia and the Chinese mainland/Hong Kong SAR were in renminbi, compared with 7.7 per cent and 1.9 per cent in 2013 and 2012, respectively.

Bill Doran, head of Oceania for SWIFT, said in a statement that about 98 per cent of the payments were institutional.

 

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