CNH Tracker-China's currency faces long road to reach big world trade role

HONG KONG, July 17 Thu Jul 17, 2014 3:56am EDT

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HONG KONG, July 17 (Reuters) - A flurry of significant initiatives has been hailed by some market participants as evidence the Chinese yuan can overtake established currencies in global trade settlement soon - but don't bet on it.

In June, the People's Bank of China (PBOC) appointed yuan-clearing banks in London and Frankfurt, with Paris and Luxembourg expected to get one each soon. South Korea said it would introduce direct trading between the won and the yuan.

Important as these moves are for the offshore renminbi market, there are factors explaining why the yuan won't overtake the pound, the euro and the U.S. dollar's lead in trade settlement currencies anytime soon.

The biggest one is the sheer scale of trade settlement volumes. While trade settlement data in currency terms country-wise is difficult to get, SWIFT data provides the closest proxy - and its numbers show the yuan is still well down the table.

In rankings by value, the yuan ranks seventh as a global payments currency with a share of 1.5 percent compared to the U.S. dollar (41 percent), the euro (32 percent) and the pound (8 percent).

Even within Asia, where Beijing has focused its efforts promoting renminbi-use - and where every country counts China among its top three trading partners - progress over the past five years has been slow.

The greenback is still the region's predominant currency for settling trade, with a market share of nearly 80 percent, according to SWIFT. Recent complications that likely will delay the roll-out of China's planned worldwide payments superhighway could make it harder to raise the yuan's share.

Also, the yuan is unlikely to be used for settling trade payments when neither the buyer nor the seller is in China.

Even in Europe, where top Chinese officials have recently been on a charm offensive, when firms want China's currency, they use their euros and pounds to buy dollars, and then use those dollars to buy renminbi.

This reflects the fact the market in dollar-denominated assets is exceptionally deep and liquid, which keeps down transaction costs.

In other words, European practice reflects the dollar's "exorbitant privilege" as the only true global currency, freely accepted by currency traders and investors around the world, and that is unlikely to change soon, Barry Eichengreen, a former senior policy adviser at the International Monetary Fund wrote for Project Syndicate.

The dollar's premier status is also reflected in foreign-exchange trading volumes. Renminbi trading with non-U.S. dollar currencies is a fraction of what's done in the greenback.

In global markets in the three years ending April 2013, renminbi-dollar trades averaged $113 billion a day, whereas direct renminbi-euro trades is a fraction of that amount, according to the latest survey of foreign-exchange markets by the Bank of International Settlements.

Another factor blunting the yuan's challenge to overtake other currencies for trade-settlements is linked to China's economic outlook. If economic growth slows significantly or the country is faced with financial problems, there could be significantly less demand for yuan-denominated assets.

Concerns about capital outflows resurfaced after the official Xinhua news agency last week said the PBOC is looking into allegations by a state broadcaster that Bank of China , the country's fourth largest lender, has been laundering money offshore for clients.

Fortunately for the architects of the yuan liberalisation project, second quarter GDP numbers released on Wednesday and a record half for issuance in the offshore yuan market means investors are still optimistic about the near-term outlook.

WEEK IN REVIEW:

* Give me yuan. J.P. Morgan Asset Management said it would launch a share class hedged to the renminbi for its ASEAN Fund on July 21. As an investment category, RMB-hedged classes were launched in three of its income generating funds earlier this year.

* Total returns. HSBC Global Asset Management launched a Chinese fixed income fund that aims to invest for total return in renminbi terms, through investments primarily in a portfolio of fixed income securities and money market instruments under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme.

* Rapid growth. Taiwan's yuan deposits have grown rapidly since a yuan clearing agreement was signed with China last year. The island had 292.738 billion yuan ($47.19 billion) in yuan deposits as of late June, versus 290.097 billion yuan in May, the central bank said this week.

* Familiar paper. Taiwan financial regulators are planning to allow Chinese tourists to buy yuan financial products when they travel to the island, a newspaper reported on Monday, in the latest sign of warming ties across the Taiwan Straits.

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(Additional reporting by Michelle Chen; Editing by Richard Borsuk)

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