Last week, the Russian energy giant Gazprom made headlines when it announced it would start accepting yuan for payments. Since Gazprom produces 17% of the world’s gas and a whopping 83% of Russian supplies, there has been renewed talk of the yuan as a global currency — some pundits even see the US dollar fading into the background. But how realistic are such assessments? Will the dollar lose its charm while the yuan blooms in transactional beauty?
Undoubtedly, China is an economic force to be reckoned with. Its international trade volume led the world last year, surpassing the US total by US$318 billion. It has also risen to become the world’s second-biggest economy despite being relatively much poorer than the US and Japan. Most analysts see China overtaking the US in absolute terms to become the world’s No.1 economy within a decade. But if differences in purchasing power are taken into account, that may happen as soon as this year.
China also ranks fourth in tourist arrivals, welcoming 56 million international visitors last year. Beijing airport is the world’s second busiest for passenger movements after Atlanta and fifth in aircraft movements. But despite China’s growing dominance on the global economic scene, its currency remains far from world-beating status. Figures from the Bank of International Settlements (BIS) are worth a thousand words.
Last year the yuan accounted for just 2.2% of global currency turnover — bear in mind the percentage is out of 200% since all currency turnover involves a pair. Still, it’s remarkable when you consider its share a decade ago was just 0.1%. Data from the Belgium-based Swift also show the yuan moving up in recent years. In May, payments in yuan accounted for 1.47% of all payments, more than double the figure from early last year. But when we compare these figures with China’s share of world exports, at more than 12%, we can understand why the yuan is not living up to Beijing’s expectations.
In contrast, BIS data show the US dollar captures 87% of all transactions, implying that any currency, when exchanged, will almost always be with the dollar. That level has varied in recent years but only marginally. A low of 85% was reached at the height of the sub-prime crisis in 2008. Clearly, the dollar is not going anywhere any time soon.
Finally, exchanges from yuan to dollars accounted for 2.1% of all global currency transactions, which probably is the majority of yuan transactions. The yuan’s rise mainly reflects moves to make it more easily convertible to the dollar, not to replace it.
Eyes off the dollar: Of course, the dollar and yuan are not the only currencies competing for attention in the BIS league. Though at some distance, the euro is next in line to the dollar, trailed by the yen and the British pound. The charts show the yuan has a long and hard road ahead.
Some top currencies have lost their allure, and that’s where the yuan will gain ground more easily. The euro’s share over the past decade has fallen steadily to 33.4% from 37.4% due to the debt crisis and fears of a euro-zone break-up. The worst performer, however, was the pound, slipping to 11.8% last year from 16.5% in 2004.
The yuan has benefited over the past decade at the expense of the euro and sterling. But the biggest gainer was the Australian dollar, increasing its share to 8.6% from 6%. Still, neither is a contender to replace the US dollar any time soon — unless, of course, more drastic measures are taken.
Underdog favourite: For those rooting for the yuan, not all hope is lost. The Chinese currency has been picking up the pace thanks to swap lines with major central banks such as the Bank of England and the European Central Bank. China has also designated two yuan clearing houses in Europe — in London and Frankfurt — to accommodate yuan liquidity needs. These moves will do a lot in terms of introducing yuan into mainstream trade and finance.
And while we suspect Gazprom’s announcement was based on a geopolitical agenda rather that any attempt to undermine the dollar, the yuan has undoubtedly arrived and will play an increasingly more important role on the global financial scene.
Looking closer to home, as Thailand integrates more with other regional economies, the yuan will take a bigger role in our transactions. Currently it is the third most bought and sold currency through commercial banks after the dollar and yen. Yuan now account for 10.8% (again out of 200%) of Thailand’s total turnover of foreign exchange, up from only 3.3% at the end of last year. Give it one more year and the yuan may well be the second most exchanged currency in Thailand.
The right question to ask is not the effect of the yuan replacing the dollar on a global scale, as that possibility remains far off, but the consequences of imminent yuan domination in this part of the world.
TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Benjarong Suwankiri and Warapong Wongwachara. They can be reached at tmbanalytics@tmbbank.com