China's Renminbi: Progress and Challenges in Global Currency Integration

China's renminbi currency has gned momentum in its role as an international exchange medium, particularly within cross-border transactions conducted with the country. The Chinese government's proactive efforts to promote the global use of the renminbi are evident in this progress. According to data from China's State Administration of Foreign Exchange SAFE, the renminbi surpassed the US dollar for the first time as the leading currency for cross-border payments within China, rising to a 47 market share in settlement transactions in 2021a significant increase compared to its share of only 23.9 five years prior.

The rise has been largely attributed to heightened foreign investment activities involving renminbi assets, alongside the renminbi's growing acceptance as an alternative currency for trade settlements. As Chinese A-shares have been included in major global equity indices and onshore renminbi-denominated bonds entered certn international bond indexes since 2018, this has contributed to the higher frequency of renminbi-based transactions.

In terms of goods and services trade, the renminbi's usage as a settlement currency rose by almost double from its baseline in 2016 to reach 19.8 for China's total trade volume. This suggests a broadening tr where more economies are embracing the renminbi as part of their cross-border financial transactions.

Yet, while this development demonstrates encouraging signs of integration into global markets, it also reflects the current state of the renminbi's international presence agnst broader economic indicators:

1. GDP and Global Trade: Despite China being a major contributor to global GDP and merchandise trade volumes, its currency's reserves as part of global financial holdings remn low compared to other major currencies.

2. International Financial Markets: In terms of direct financing activity, such as offshore loans and deposits held in renminbi, they only account for approximately 0.5 of total renminbi-based funding activities onshore. This contrasts with the extensive foreign usage of US dollars, euros, and Japanese yen across global financial markets.

3. Reserve Holdings: Currently, renminbi-denominated reserves represent around 3 of global reserve holdings, which is an increase from 1 in 2016 but still significantly lower than other international currencies.

Geopolitical factors may influence the growth trajectory of China's currency as a potential global conter. As uncertnties persist and investors seek diversification to mitigate risks associated with traditional major currencies, there might be room for the renminbi to capture additional market share.

However, it's important to note that despite its recent advancements in international transactions within China, the renminbi still faces significant barriers compared to established global currencies like the US dollar and euro. Factors such as interest rate spreads between China and developed markets impacting investor incentives might mitigate potential gns for renminbi assets in the short term.

In , while Chinese efforts have advanced the renminbi's standing within its own borders as an international currency, there remns substantial room for growth when compared agnst broader global economic indicators. The story of China's currency is one that highlights both progress and challenges on the path to becoming a truly global player in financial markets.

does not constitute professional investment advice or any form of recommation from Goldman Sachs entities. Any information herein is provided for informational purposes only, subject to our privacy policy, and we disclm liability for any decisions made based on such content.

Please review our Terms Conditions and Security Fraud Awareness guidelines before proceeding further with your interaction.

For more resources and insights from our firm, subscribe to our briefings newsletter here.
This article is reproduced from: https://www.goldmansachs.com/insights/articles/chinas-currency-rises-in-cross-border-trade-but-remains-limited-globally

Please indicate when reprinting from: https://www.i477.com/foreign_exchange_RMB/China_Renminbi_International_Usage_Trends.html