As far-fetched as the notion may be to those who are wedded - by choice, by misguided beliefs, or by virtue of being completely beholden to the perpetuation of the status quo - to idea that the dollar will forever retain its status as the world’s reserve currency, the yuan is set to play a critical role in global finance, investment, and trade going forward.
We’ve long argued that the BRICS bank, the AIIB, and to an even greater extent, the Silk Road Fund, will help to usher in a new era of yuan hegemony in international investment and trade. A number of recent developments support this, including Beijing’s push for the renminbi to play an outsized role in loans doled out through the AIIB, the denomination of loans [12] from the BRICS bank in yuan, and China’s aggressive investment in Pakistan and Brazil via the Silk Road initiative (here [13] and here [14]).
As for financial markets, China recently confirmed the impending launch [15] of a yuan denominated gold fix which conveniently dovetailed with the LBMA’s acceptance [16] of the first Chinese banks to participate in the twice-daily auction that determines London gold prices.
Now, in the latest sign of yuan proliferation and penetration, the renminbi will be accepted as collateral by the LME along with the dollar, the euro, the pound, and the yen.
Here’s WSJ with more [17]:
China’s domestic stock market may be in turmoil but the country’s currency, known as the yuan or renminbi, is making a seemingly relentless push deeper into the global financial system.
The latest step: the London Metal Exchange, the world’s largest venue for trading metals where $15 trillion of metals was traded last year, is set to accept yuan as collateral for banks and brokers that trade on its platform.
The Chinese currency joins the U.S. dollar, the euro, the British pound and Japan’s yen, which are all currently permissible as collateral on the LME’s platform.
"In the commodities area, it makes absolute sense to start providing renminbi-denominated services," said Trevor Spanner, chief executive of the LME’s clearing house business. “The renminbi is on its way to becoming one of the world’s most widely used currencies” he said.
While largely a technical change, the LME move marks another milestone for China’s currency.
The yuan is now the fifth most used currency for international payments, ranking number seven a year ago, according to data from the Society for Worldwide Interbank Financial Telecommunication, a provider of payments services.
A Bank of England survey on Monday showed that trading in yuan rose 25% in London in the six months to April this year, even as trading volumes in other currencies fell by 8% on average over the same period.
The takeaway: irrespective of any damage China’s recent interventions into its domestic equity markets may have on the country’s SDR push, and regardless of whether the PBoC cash injection into CSF spooks the market and serves to accelerate short-term capital outflows, the internationalization of the yuan isn’t likely to be meaningfully derailed.
We’ll leave you with the following quote from Dan Marcus, CEO of London-based currency trading platform ParFX who spoke to WSJ [17]:
"The rise of China’s currency on global markets is arguably the most significant development in currency trading since the introduction of the euro in 1999."
