Yuan Hits Milestone in Trade Finance DealsChina's Currency Passes Euro, Yen to Become Second-Most Used Currency After DollarNicole Hong
Updated Dec. 3, 2013 7:34 p.m. ET
China's burgeoning influence on the world economy reached a milestone as use of the yuan in trade finance overtook the euro and the yen.
Importers and exporters used China's currency for 8.7% of their financing agreements with trade partners in October, up from 4.4% a year earlier, according to Swift, a financial-services firm that monitors international currency flows.
That made the yuan the second-most used currency in trade finance but still well behind the U.S. dollar, which backs 81% of trade finance.
Trade finance includes "letters of credit," which are bank-issued guarantees between two companies that a payment will be made at a future date for specific goods.
While these trade guarantees are a sliver of the $5.3 trillion-a-day foreign-exchange market, the rapid adoption of the yuan is part of China's efforts to boost the currency's role on the international stage. In September, the Bank for International Settlements said the yuan had cracked the top 10 most-traded currencies for the first time, leaping to ninth place from 17th in 2010. Daily trading in yuan tripled to $120 billion in the same period.
The Chinese currency trades within a narrow band dictated by the Chinese government, although Beijing has worked to loosen the band in recent years. In late October, the yuan appreciated to an all-time high of 6.08 yuan per dollar, but it has weakened slightly since then.
The government has taken steps to make it easier to convert in and out of yuan, with an eye toward competing with the U.S. dollar, which dominates global trade flows, as well as other widely circulated currencies such as the euro, British pound and yen.
These efforts dovetail with China's emergence as an important player in global trade and the world's second-largest economy. China overtook the U.S. to become the biggest trading nation in the world last year, the U.S. Commerce Department reported earlier this year.
"Companies are getting more of a comfort zone to trade in renminbi," said Debra Lodge, a New York-based head of renminbi business development at HSBC HSBA.LN -1.15% Bank USA N.A., a unit of HSBC Holdings PLC. Renminbi is commonly used name for the yuan. "It's just a natural progression in the opening up of China."
Even though the yuan is playing a bigger role in credit instruments, not much of the currency is actually changing hands outside China.
The yuan is still being used to pay for just 0.8% of all global transactions, lagging currencies from much smaller economies, including the Thai bhat and Swedish krona, according to Swift.
Most of the trade finance in China occurs with Hong Kong and Singapore, meaning the yuan's growing use is primarily a regional phenomenon for now.
Some Chinese companies may be using trade finance as a way to borrow money more cheaply offshore, evading strict restrictions on lending at home.
Restricting new loans has been a top priority for Chinese officials this year, especially as the country's shadow-banking system continues to find creative ways to attempt to get around lending limits.
Domestic debt in China has ballooned since the financial crisis, raising concerns that the country could face a banking crisis in the future. Last week, Chinese regulators cracked down again on credit growth by preventing financial institutions from disguising corporate loans as interbank loans.
A Chinese company can circumvent the country's capital controls by getting a yuan-denominated letter of credit from its Hong Kong subsidiary, for instance, and using the proceeds to obtain a loan in Hong Kong for a lower interest rate. China's benchmark interest rate is 6%, while the rate in Hong Kong is 0.5%.
"It's not the easiest to get money into or out of China, so savvy Chinese businesses are using letters of credit as a way to borrow at a lower rate outside of China," said Alfred Nader, a vice president at global payments firm Western Union Business Solutions.
If this is the case, the yuan may not be gaining as much traction in global trade as the numbers initially suggest.
Still, the gradual rise in the yuan's usage globally is significant, and China's government has shown signs recently of redoubling its efforts to promote the currency.
On Monday, China's central bank unveiled a blueprint to make it easier for businesses and individuals in Shanghai's free-trade zone to invest abroad, a measure partly aimed at increasing flows of yuan into and out of China.
Last year, China's central bank said foreign importers could save 2% to 3% on their invoices if they pay in yuan.
By paying in yuan, American and other foreign companies can get more competitive pricing from their Chinese suppliers. For the Chinese supplier, accepting yuan payments eliminates the necessary fees to convert dollars to yuan, along with any risk of exchange-rate fluctuations.
"Changing China's currency is not like turning a battleship; it's like turning an aircraft carrier," said John Rutledge, chief investment strategist at asset manager Safanad SA.
"It'll take decades before the renminbi is a stable, liquid currency like the dollar," Mr. Rutledge said.
—Clare Connaghan contributed to this article.