Renminbi becoming anchor currency in commodity trading, investments: market watchers

CHINA’S renminbi is gaining ground as a settlement currency for select commodities, a trend which some market watchers say puts it on track to becoming an anchor currency in commodities trading on the back of growing demand as well as geopolitical tensions.

Cross-border payments in yuan rose between 2017 and 2022. These settlements made up 18 per cent of China’s total value of goods traded in 2022, said a report by the People’s Bank of China in February.

In March, Chinese national oil company China National Offshore Oil Corp and France completed China’s first yuan-settled trade in liquefied natural gas (LNG) through the Shanghai Petroleum and Natural Gas Exchange.

Peter Chia, senior foreign exchange (FX) strategist at UOB, said direct yuan settlement trade deals have coincided with China’s reopening of its economy since last November.

“As China is a major trade partner of most countries, it naturally lends scope for the proportion of direct renminbi settlements to increase – albeit from a low base. Also, currency stability may be another factor acting in China’s favour,” he said. 

Chia noted that the renminbi has “steadily appreciated” against the currencies of its trade partners “over the course of the pandemic”; the US dollar index, on the other hand, has swung between losses of about 7 per cent to gains of about 14 per cent over the same period.

Maybank’s head of forex research Saktiandi Supaat said the use of renminbi in commodities trade would provide better pricing options than cross-currency conversions with the US dollar or other currencies – which would add additional transaction costs. 

Chang Wei Liang, FX and credit strategist at DBS, said commodities priced in yuan would give greater price certainty to Chinese buyers because there are no exchange-rate risks. 

“This may help bolster Chinese demand and trading,” he added. The strategist cautioned, however, that the renminbi market is “not as liquid” as that for the US dollar, and traders could face greater price volatility during Chinese holidays, when liquidity thins.

Beyond commodities and international trade, the renminbi is also being increasingly utilised for investment, noted DBS’ Chang. 

“China has widened access to its onshore bond and stock market for foreigners via the Bond Connect and Stock Connect schemes, and this is also driving greater use of the renminbi among international investors,” he said.

Some market watchers said the popularity of the Chinese currency could also be fuelled by tensions between the United States and China.

Sim Moh Siong, currency strategist at Bank of Singapore, said some traders are increasingly “avoiding the US dollar” because the US could “weaponise” its currency through financial sanctions.

“Countries are increasingly wary of that... and that’s why I think there is also a conscious effort to perhaps reduce the reliance on the US dollar as a unit of trade,” he noted. Sim cited Russia, another major commodity exporter, as having been caught in financial sanctions. 

In an environment of rising US-China tensions, the use of the renminbi could act as “a hedge against any conflict” that could arise between the two global economic powerhouses, added Maybank’s Supaat.

He reckons commodities such as gold and copper could be next in line to be traded in renminbi. This is provided China “pursues its policy of gradually freeing up trade in the currency”.

Chinese customers and end-consumers such as refiners and fabricators typically pay for such imports with US dollars, he said. However, the renminbi could be used increasingly to settle contracts in China. 

The currency could eventually wind up as the “basis for commodities trading” in Asia if capital controls are eased further, and the renminbi becomes “more freely convertible” like the US dollar.

But for now, market observers noted that the reach of the renminbi is still quite limited.

Maybank’s Supaat said the renminbi is not easily convertible: “There are still capital controls, which could mean that exporters paid in renminbi also face substantial costs in getting their proceeds out of China fully,” he said.

The renminbi’s share of global Swift (Society for Worldwide Interbank Financial Telecommunications) payments stands at just above 2 per cent, he said. 

“While the settlement in yuan for the LNG trade is a milestone for yuan internalisation, there is still some reluctance to accept payments in (renminbi),” he added. 

Bank of Singapore’s Sim said it could take five to 10 years for the Chinese currency to match the US dollar in commodity trade, given the “constraints” on the currency’s usage.

“There’s (currently) a limit to what you can buy with the Chinese currency. You can buy Chinese equities and bonds, but the investment opportunities are limited, and there are also risks associated with investments in China,” Sim said. 

But he noted that the renminbi’s reach in capital markets has been quickly growing, especially since the country has been trying to internationalise its currency. 

Around the world, countries have also been turning to China. 

On Apr 4, Malaysian Prime Minister Anwar Ibrahim reportedly said China is open to talks with Malaysia on forming an Asian Monetary Fund. He had also proposed setting up the fund at the Boao forum in Hainan, after stressing the need to reduce reliance on the US dollar or the International Monetary Fund. 

At the end of March, the renminbi also surpassed the euro to become the second most important currency in Brazil’s foreign reserves, Reuters reported.