But with trade increasing along the Silk Road and beyond, and innovative Chinese payments platforms growing in popularity, its share of global payments is likely to increase in coming years.
The renminbi's share of global business in international payments has fallen behind both the Japanese yen and Canadian dollar since 2016, according to data from Swift.
There is always room for ambiguity in such figures, reflecting the different methodologies used by different sources. Celent calculates renminbi as the fourth biggest global currency for payments, with the majority of cross-border renminbi payments used for trade settlement.
But Swift ranked the Chinese currency as number six in June 2017, down from fifth place in June 2016, with renminbi's share of global payments declining from 2.09% of value to 1.98% in a year.
This is being driven in part by declines in letters of credit (LoC), especially those denominated in renminbi. LoCs are declining everywhere, with Swift recording a 33% drop in their use globally between January 2014 and June 2017. But the drop has been even more pronounced for renminbi-denominated LoCs, which have seen a 43% drop over the same period.
There has also been a marked decline in the number of renminbi deposits in key offshore centres such as Hong Kong, Singapore, and Taiwan. But these are at least partially explained by the emergence of new opportunities for direct investment into the mainland, and new payment and settlement infrastructure to support growing volumes, says Arin Ray, an analyst in Celent’s securities and investments practice.
“While China seeks greater adoption of its currency in international transaction and reserve portfolios, it will prefer an increasing share of new activities to be carried out using new domestic-focused systems and channels,” says Ray.
Overall, Swift notes that “the total volume of payments to and from China has been stable, slightly increasing, reflecting continued strength in cross-border transactions and the growing commercial exchange to and from China.”
This trend is being boosted by Chinese government policy, and in particular the Belt and Road initiative. As Chinese companies make more renminbi-denominated investments overseas, the region is seeing increased use of the currency for cross-border trade, cash management, financing and investment purposes.
“Chinese companies will definitely play a bigger role in increasing the international usage of renminbi – a fundamental purpose of the Belt and Road,” says Vina Cheung, global head of renminbi internationalisation, global liquidity and cash management, Asia-Pacific at HSBC.
Arin Ray, Celent
Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan in particular have seen marked growth in the use of renminbi for credit transfer payments (CTP), according to Swift, while in South East Asia renminbi for CTPs is increasing from China into Indonesia, Malaysia, Thailand and Vietnam.
However, not all Maritime Silk Road markets have seen such increases. Egypt, Kenya, Greece and India, have so far seen minimal adoption of renminbi for CTPs, notes Swift. The picture is also mixed in Europe, where increasing renminbi use for CTPs from China to Germany, Poland and the Czech Republic is offset by declines in payments from China to the Netherlands, France and Italy.
From CNAPS to CIPS
Chinese investment in its payments infrastructure is also starting to clear some of the hurdles that have traditionally deterred foreign use of renminbi for payments. China’s domestic payment system – China National Advanced Payment System (CNAPS) – does not support international standards and formats or languages, making it very difficult to use outside of China.
But in late 2015 China launched the Cross-Border Interbank Payment System (CIPS), an interbank payment system designed to facilitate the use of the renminbi for international payments that incorporates ISO 20022 standards.
Phase II of CIPS implementation will deliver extended operating hours and a netting mechanism that will further encourage the use of renminbi for cross-border payments, says Swift.
This has not removed every obstacle for those outside China considering making payments in renminbi. Complex regulatory requirements still stipulate that onshore and offshore currency be identified separately, despite the two markets sharing an ISO code.
And payments in renminbi can throw up know your customer (KYC) and Anti-Money Laundering (AML) compliance challenges due to difficulties translating Chinese names and characters into the Latin alphabet. “Many Chinese characters have the same or similar pronunciation, making it difficult to identify which characters a translated name represents,” says Celent’s Ray.
But at least international participants wishing to access renminbi liquidity have a growing number of options. They can use Hong Kong’s Clearing House Automated Transfer System (CHATS) settlement system to access renminbi liquidity, or source it from offshore clearing banks or central banks with swap agreements with the PBoC.
Evidence shows this is having an effect. In June 2017, Swift data shows that more than 1,900 financial institutions made worldwide payments in renminbi, with 1,295 of those involving China or Hong Kong – a 16% increase compared to June 2015. Renminbi use for transactions outside of China and Hong Kong are also significant, with more than 600 banks making such payments.
China’s dominant position in the global commodities markets gives it an opportunity to increase renminbi use as a global settlement currency in such trade, says Ray, as it has already demonstrated in the gold market with its renminbi-denominated gold benchmark.
New financial technologies are also encouraging increasing renminbi use. By July 2017 China’s regulator has issued 30 licenses to qualified digital companies to make cross-border payments, with third party mobile payments in China enjoying double-digit growth in the last three years, says Swift.
Chinese fintech giant Alipay has about 450 million users worldwide, while Tencent’s WeChat Pay has 800 million. “Although today the vast majority of these customers and their payments are within China, payment services are increasingly popular in markets frequented by Chinese tourists,” says Swift.
“Fintech is changing the last mile payment experience for both retail and corporate customers and we can expect financial technology to play a large role in further adoption and utilization of the renminbi,” says Swift.