China’s dream of making the yuan a global currency hit by Hong Kong protests, depreciation, analysts say

Karen Yeung

Global payment transactions in July involving the Chinese yuan dropped to the lowest level since October 2018 as the Hong Kong protests, reduced global trade flows and its depreciation since the spring hinder offshore use, analysts said.

The yuan’s share in international payments dropped to 1.81 per cent in July from 1.99 per cent in June, slipping behind the Canadian dollar as the sixth most-used international transaction currency, according to financial messaging service provider Swift.

The yuan’s use was far behind the US dollar, which accounted for 40 per cent of international payments, the euro at 34 per cent as well as the British pound and the Japanese yen.

Transaction conducted in or through Hong Kong accounted for three quarters of the yuan’s offshore use, but 13 weeks of anti-government protests and the impact of a deepening US-China trade war have delivered a double blow to Beijing’s strategic plan to make the yuan a widely used international currency, according to analysts.

Xia Le, a Hong Kong-based economist for Spanish bank BBVA, said the protests in Hong Kong had cast a shadow on the local economy, particularly the retail and tourism businesses that often accept the yuan as a payment method from visitors from mainland China.

“The unrest in Hong Kong lowered the yuan’s use because the yuan was quite widely used in the city,” Xia said. “Now tourists are gone, and the yuan’s use will be affected.”

Hong Kong is the dominant offshore yuan trading centre, accounting for 75 per cent of yuan-denominated international payments in July, followed by Britain at 5.9 per cent and Singapore at 3.5 per cent, according to Swift.

The yuan’s exchange rate began falling in Hong Kong months before the protests started, with deposits in the city sinking to a three month low of 604 billion yuan (US$84 billion) at the end of June.

The yuan’s depreciation, and a widely shared market view that the yuan would weaken further amid a trade war with the US, has further dampened the willingness of investors and consumers to use the currency, analysts said.

“The share of yuan in global payments will remain subdued, particularly after the yuan weakened beyond one dollar for seven yuan [earlier this month],” added Xia.

The share of yuan in global payments will remain subdued, particularly after the yuan weakened beyond one dollar for seven yuan [earlier this month]

Xia Le

Chinese authorities have let the yuan’s exchange rate depreciate by about 15 per cent against the US dollar since the onset of the trade conflict in March last year to counter the effect of American tariffs. On Thursday, the yuan was changing hands at 7.1705 per US dollar, its weakest level in 11 years. 

Standard Chartered analysts Becky Liu and Terry Chan said on Thursday that Beijing will allow the yuan to depreciate further in response to higher tariffs from the US. The bank has lowered its forecast for the yuan exchange rate at the end of 2019 to 7.23 against the US dollar from the previous estimate of 6.86.

Eugenia Fabon Victorino, head of Asia strategy at SEB Markets, estimated that the yuan would need to continue to fall to around 7.8 per US dollar by the end of the year to fully absorb the effects of the actual and planned US tariffs on Chinese goods.

Trade tensions between China and US have slowed down trade flows between the world’s two largest economies, and this, in turn, has hurt cross-border yuan payments, said Carie Li, an economist at OCBC Wing Hang Bank.

“The yuan internationalisation process through cross border payments is slow because of the impact from the trade war and shrinking Chinese trade,” Li said. “On the other hand, foreigners’ demand for yuan assets is also falling because of a depreciating currency.”

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