China's hopes of globalising currency hit snag
China's renminbi slipped a notch to become the sixth most-used global currency over the course of last year, hit by depreciation and government capital controls, a report said Thursday.
Analysts said the drop was a setback for Beijing's ambitious plans to dramatically increase the use of its currency abroad and make it a mainstay for international payments on par with the dollar or euro.
China is viewed as having made progress over the years in gradually internationalising the unit, but new challenges have emerged recently in the form of slowing growth, a strong dollar and a surge in capital leaving the country in search of more profitable investments overseas.
The renminbi's share of international payments fell from 2.31 percent in December 2015 to 1.68 percent last month, global interbank network SWIFT said in a report titled "RMB internationalisation stalls in 2016".
It also said "the payments value for the RMB decreased by as much as 29.5 percent in 2016", but it did not provide corresponding overall figures.
China has taken a number of steps over the years to increase the global use of the renminbi, also called the yuan, including currency-swap arrangements with other countries and increased linkages between its financial markets and payments systems with the outside world.
But the renminbi was pummelled last year as the dollar spiked. Investors moved huge sums of money offshore due to concern over China's slowing economy and the currency's future, which put further pressure on it.
The renminbi's falling global usage "may be attributed to a convergence of several events: the slowdown of the Chinese economy, the volatility of the RMB exchange rate and regulatory measures on capital outflows", Michael Moon, SWIFT's head of payments markets for the Asia-Pacific, said in the report.
Wait and see
China has in recent months announced a series of new measures to stem capital flight and slow the currency's descent.
SWIFT's report said improvements in the global payments system and other factors will have a long-term "positive impact on the continued internationalisation of the currency".
But the renminbi's share of global transactions looks unlikely to significantly rise as long as China limits capital flows and the yuan stays weak, both of which curb its attractiveness, said Julian Evans-Pritchard, China economist with Capital Economics in Singapore.
It could also face more pressure if new US President Donald Trump follows through on pledges to take protectionist moves or stimulate the American economy, which are likely to further lift the dollar, he said.
"That will continue to be a source of downward pressure on the renminbi and thus stricter capital controls," Evans-Pritchard said.
He added recent developments do not necessarily represent a "permanent setback" for the renminbi going global over the longer term.
"But it's still wait-and-see on internationalisation. I don’t think we'll see much progress in the next couple years," he said.
The US dollar retained its position as the leading global currency in December, with 42.09 percent of global payments, according to SWIFT.
It was followed by the euro (31.30 percent), the pound (7.20 percent), the yen (3.40 percent) and the Canadian dollar (1.93 percent), which leapfrogged the renminbi compared to December 2015.