Standard Chartered Report: The share of RMB-settled goods trade hit a nine-year

In 2023, the Standard Chartered Renminbi Global Index (RGI) rose by 33% quarter-on-quarter, marking the largest increase since 2014, and in the first four months of 2024, the index continued to rise by 9.1% quarter-on-quarter.

On June 13th, Standard Chartered Bank released its latest report, stating that in the first four months of 2024, the internationalization of the renminbi continued to rise, maintaining the momentum since 2023. The bank's Renminbi Global Index (RGI) assesses the global usage of the renminbi. In 2023, the RGI index increased by 33% quarter-on-quarter, the largest rise since 2014, when the first acceleration of renminbi internationalization was nearing its peak. In the first four months of 2024, the index continued to rise by 9.1% quarter-on-quarter.

The RGI evaluates the internationalization process of the renminbi from multiple indicators, including offshore renminbi deposits, cross-border renminbi payments, offshore renminbi foreign exchange transactions, the issuance of offshore renminbi-denominated bonds (dim sum bonds), and foreign holdings of onshore assets. This reflects the multifaceted roles of the renminbi in settlement, pricing, financing, and investment.

In terms of cross-border settlement, in the first quarter of 2024, the share of renminbi settlement in China's goods trade increased from 26.8% in the second half of 2023 to 28.5%, the highest level since the third quarter of 2015, setting a new high in nearly nine years.

In financing, thanks to the lower offshore renminbi financing costs compared to other major currencies, the total issuance of offshore renminbi bonds and negotiable certificates of deposit in the first four months of 2024 increased by 61% year-on-year, and the net issuance increased by 83% year-on-year.

Regarding foreign holdings of onshore assets, due to the considerable investment returns after foreign exchange swap operations, the inflow of funds from foreign holdings of onshore bonds has continued to rebound. From the beginning of 2024 to the end of May, despite a 20% year-on-year decrease in foreign holdings of onshore stock market assets, interest in investing in the onshore stock market has picked up.

Since 2024, the renminbi exchange rate has been under continuous pressure, and the onshore renminbi broke through the 7.25 threshold on June 11th, reaching a new low in nearly seven months. However, according to Standard Chartered Bank, the ongoing expectation of renminbi depreciation has not significantly hindered the internationalization of the renminbi. This phenomenon indicates that the use of offshore renminbi is more driven by real demand rather than speculative demand, and the offshore renminbi market is becoming more mature.

For several months, the amount of goods trade settled in renminbi has exceeded one trillion yuan.In the first few months of 2024, the RGI, a measure of the internationalization of the Chinese yuan, did not rise at a constant pace. It increased in January, was flat during the Spring Festival in February, and rebounded after the festival in March. This was particularly evident in the cross-border renminbi payment indicators.

Data from Standard Chartered Bank shows that in the first quarter, the average share of renminbi settlement in goods trade was 28.5%, a significant improvement from the 26.8% in the second half of 2023, and the highest since the third quarter of 2015 (29.4%). In terms of total amount, in the eight months leading up to March 2024, renminbi settlement in goods trade exceeded one trillion yuan for six months.

Zhu Helin, Deputy Governor of the People's Bank of China (hereinafter referred to as "PBOC") and Director of the State Administration of Foreign Exchange, stated at a press conference in April that in the first quarter, the proportion of cross-border settlement in all of China's goods trade using renminbi was nearly 30%, making the renminbi the fourth largest payment currency globally for four consecutive months.

Standard Chartered Bank believes that the use of renminbi by enterprises is the main driver for the increase in cross-border renminbi payments. As multinational corporations place greater emphasis on risk diversification and supply chain stability, the global supply chain is expected to accelerate its transformation post-pandemic, and the share of renminbi settlement in global goods trade is expected to continue to rise in 2024.

The cross-border renminbi fund receipts and payments between Mainland China and overseas are the source of overseas renminbi liquidity. The nature of the funds, regional distribution, and the growth of the scale of receipts and payments reflect the characteristics of the cross-border circulation of renminbi funds.

A recent report from the Bank of China stated that the current cross-border renminbi receipts and payments between Mainland China and overseas exhibit the following characteristics: First, under the current account, cross-border renminbi receipts and payments have increased, breaking through 14 trillion yuan in 2023, a year-on-year increase of 33.4%. The cross-border renminbi receipts and payments under the current account account for 26.8% of the total renminbi cross-border receipts and payments, an increase of 1.9 percentage points from 2022, with the proportion of goods trade receipts and payments increasing by 1.6 percentage points from 2022.

Second, the proportion of some regions in China's cross-border renminbi customer remittances is roughly equivalent to the proportion of these regions in China's foreign trade. In 2023, cross-border renminbi customer remittances with RCEP member countries and with the EU and the UK accounted for 21.0% and 16.2% of the total volume of China's cross-border renminbi customer remittances, respectively, which is roughly similar to the proportion of these countries in China's total foreign trade.

Third, Shanghai plays a pivotal role in the outflow and inflow of renminbi across borders. In 2023, Shanghai's cross-border renminbi settlement volume accounted for over 40% of the national total, with the cross-border renminbi settlement volume under securities investment accounting for about 60% of China's total.

Fourth, the scale of renminbi cross-border receipts and payments between China and the RCEP and "Belt and Road" regions is growing rapidly. Hong Kong, China, the RCEP free trade area, and the EU and the UK account for 37.4%, 21.0%, and 16.2% of the total volume of China's cross-border renminbi customer remittances, respectively, with the three combined accounting for 74.6% of the total volume of cross-border renminbi customer remittances in Mainland China.Dim Sum Bonds Start Strong

Since the beginning of 2022, with the Federal Reserve's aggressive interest rate hikes and the People's Bank of China's low-interest-rate monetary policy, the cost of offshore renminbi financing has been lower than other major currencies, which has also strengthened the renminbi's financing attributes.

As of the end of May, the implied interest cost of one-year offshore renminbi has reached 2.6%. In comparison, the short-term interest rates of U.S. Treasuries have long been around 5%.

Data from Standard Chartered Bank shows that in 2024, the renminbi bonds issued in Hong Kong, China—known as dim sum bonds—started strong. In the first four months of 2024, the total issuance of offshore renminbi bonds and negotiable certificates of deposit (NCDs) increased by 61% year-on-year to 482 billion yuan, with the net issuance amount rising by 83% to 168 billion yuan. Since the beginning of the year, the total issuance of offshore renminbi bonds has increased by 26% year-on-year to 221 billion yuan. In the first four months, the total issuance of NCDs doubled to 261 billion yuan, a year-on-year increase of 112%.

The bank expects that the issuance of offshore renminbi bonds involving foreign exchange swaps will remain strong, aiming to reduce overall financing costs or to refinance offshore foreign currency debt.

Data from Standard Chartered Bank also shows that in 2024, the issuance schedule of offshore renminbi government bonds started earlier than in previous years, with a first-quarter issuance scale of 12 billion yuan, which usually begins in the second quarter in previous years. The bank expects that in 2024, the total issuance of offshore renminbi government bonds may expand from the historical peak of 55 billion yuan set in 2023 to around 55 to 65 billion yuan, further deepening the development of the offshore renminbi bond market.

The aforementioned data also indicates that in the first five months of 2024, the issuance scale of offshore renminbi central bank bills reached 120 billion yuan, with an increase of 15 billion yuan in the outstanding balance of offshore renminbi central bank bills, showing that the People's Bank of China's stance on maintaining the stability of the offshore renminbi exchange rate remains firm.

Standard Chartered Bank estimates that, affected by seasonal factors and an increase in corporate dividend activities, it is expected that the renminbi exchange rate will be under pressure in the second quarter. Nevertheless, as the use of renminbi in international trade has significantly increased, and the improvement in China's economic growth and the stabilization of investment sentiment lead to a reduction in capital outflow pressure, the offshore renminbi liquidity is unlikely to tighten significantly.

In terms of cross-border capital flows, the trend of foreign capital flowing back into China's stock and bond markets is evident. The latest data from the Shanghai headquarters of the People's Bank of China shows that, as of the end of April, overseas institutions held 4.05 trillion yuan in interbank market bonds, accounting for about 2.9% of the total custody volume of the interbank bond market. This has been the eighth consecutive month that overseas institutional investors have increased their holdings of Chinese bonds.

According to data from the State Administration of Foreign Exchange, in April, overseas investors net purchased 124.7 billion yuan in domestic bonds and 45.1 billion yuan in stocks.Standard Chartered Bank stated that in the past eight months, foreign capital has been a net buyer of onshore bonds, mainly supported by the attractive valuations after the exchange of foreign exchange swaps for US dollars. This situation will drive a continued strong inflow of foreign capital into the onshore bond market within the year. In terms of stocks, given the market's gradually stabilizing expectations for China's economic growth, the outlook for a rebound in the onshore stock market remains positive.