The indicators for measuring the internationalization of a currency include four aspects: investment attributes, financing attributes, global payment share, and global reserve share. Among these, investment and financing are closely related and can be seen as two sides of the same coin.
The payment share is highly correlated with the reserve share because only when countries around the world use a certain currency in trade can they accumulate more of that currency, thus forming foreign exchange reserves. The reason why the US dollar accounts for more than 60% of global foreign exchange reserves is precisely because it has been the most frequently used payment tool in international trade for many years. Therefore, making progress in the payment field is a necessary step to increase the global reserve share.
In late January 2024, SWIFT updated the share of various countries' (regions') currencies in global payment currencies for December 2023. The Chinese yuan, after rising to the fourth largest payment currency globally in November, once again took the fourth place, achieving consecutive tenures. Let's look at the specific data.
The highest payment share in December last year was the US dollar, accounting for 47.54%; the perennial second-place Euro continued to rank second, at 22.41%; the British pound was third, at 6.92%; the Chinese yuan surpassed the Japanese yen to become the fourth globally, at 4.14%; after being surpassed by the Chinese yuan, the Japanese yen fell to fifth, at 3.83%; followed by the Canadian dollar, Hong Kong dollar, Australian dollar, etc.
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It is worth noting that the Chinese yuan had actually surpassed the Japanese yen in the currency payment share ranking published by SWIFT in November. In November, the share of the Chinese yuan reached 4.61%, while the Japanese yen was only 3.41%. Although the gap between the Chinese yuan and the Japanese yen in December narrowed compared to November, securing the fourth position is of great significance.
At the same time, to counter the United States' hegemonic position in the financial field and prevent sudden financial intervention like Russia - stopping local financial institutions from using SWIFT, China has increased investment and promotion of its own currency settlement system CIPS in recent years.
Some of the Chinese yuan transactions through CIPS are not counted by SWIFT, so if included, the share of the Chinese yuan in global payment would be even higher. Of course, the number of transactions directly through CIPS is not many at present, which is our future direction of effort, promoting settlement in local currency while making CIPS a more mainstream currency communication and settlement system.
From a global perspective, the payment share of the US dollar stands alone, nearly 50%, which is more than twice that of the second-place Euro. Once upon a time, the payment share of the Euro could compete with the US dollar, but it has declined sharply in the past two years for two reasons.
First, energy trade with Russia has almost stopped.
The third party most affected by the Russia-Ukraine war is undoubtedly the EU. It was coaxed by the United States to join the sanctions against Russia. Decoupling from Russia in energy not only led to rising prices in EU countries but also a serious decline in the status of the Euro.Originally, when EU countries conducted business with Russia, they primarily used the euro as the payment currency. Now that business has ceased, naturally, the euro is no longer needed.
Secondly, the international economic development of the EU has encountered setbacks, and trade volume has decreased.
The euro is the exclusive currency of the EU. Although more than 20 EU countries have unified their legal tender, they remain sovereign states. Wealthy European powers using the euro in their mutual trade transactions quickly made it the second most important international currency globally.
However, in recent years, the economies of EU countries have been underperforming. In 2023, Germany, the economic powerhouse of the EU, recorded a negative GDP growth, indicating how challenging the past two years have been for Europe.
Previously, with money to spare, buying was a common occurrence. But with economic development slowing down, they had to cut expenses. Trade volume among EU countries decreased, and the scenarios requiring the use of euros also diminished.
Apart from the US dollar, the global payment share ceded by the euro has also greatly benefited the Chinese yuan, most notably in the significant increase in Sino-Russian trade volume and the increased use of the yuan as the settlement currency.
According to data from the General Administration of Customs, in 2023, the total import and export trade volume between China and Russia was 1.69 trillion yuan, a year-on-year increase of 32.7%, which is a 78% increase compared to 2021. At the same time, TASS, the official news agency of Russia, reported that the country's prime minister stated that over 90% of trade between Russia and China is settled in yuan or rubles. The extensive use of domestic currencies in trade between the two countries has significantly benefited the global payment share of the yuan.
Does this mean that the yuan has already secured its position as the world's fourth-largest trade currency? After celebrating the achievements of yuan internationalization, we must not let our heads be turned by these interim results.
On one hand, even when including the full payment volume through CIPS, the proportion of the yuan in the global payment total is less than 5%, with a significant gap compared to the US dollar and the euro, which cannot be caught up in the short term.
More importantly, the yuan just surpassed the Japanese yen in November, and although it also did so in December, the gap narrowed from 1.2 percentage points to 0.31 percentage points. It is highly likely that it will be overtaken in January. Generally, maintaining the fourth position for at least 5-6 consecutive months is considered stable.On the other hand, our country still implements relatively strict foreign exchange controls, especially for capital account items, which cannot be freely circulated and exchanged. The prerequisite for becoming an international currency is the absence of foreign exchange controls. At present, our financial system is not yet mature, and it is not yet possible to fully liberalize, which is an unfavorable factor in the process of internationalization of the renminbi. It is also not something that can be changed in the short term.
In summary, it can be determined that the renminbi has already had the strength to challenge the status of the world's top four payment currencies, but it cannot be said to have firmly established its position. There are still many areas that need to be improved and promoted, such as accelerating the process of settlement in local currencies between the renminbi and mainstream economies, and increasing reforms and attempts in the financial and foreign exchange fields.
It is pleasing to see that in recent times, some areas of cities such as Shanghai have been conducting pilot projects related to capital account items. It is hoped that more similar attempts will be seen in the future, which will have a great positive effect on the internationalization of the renminbi.