Euro in RMB: Decoding the Currency Dynamics in Global Payments
Analysts utilize monthly reports from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to gauge the prominence of different currencies in international payments. A recent report indicated a strengthening dollar, a weakened Euro, and a steady RMB. While the dollar’s dominance is undeniable, the report might misrepresent the Euro and RMB’s actual standing due to inherent limitations in its methodology.
The SWIFT system primarily tracks transactions between nations, irrespective of monetary unions, and only includes transactions within its network. This design leads to an overestimation of the Euro’s role and an underestimation of the RMB’s influence.
The European Central Bank (ECB) highlights that a significant portion of Euro transactions occur within the Euro Area, essentially domestic transactions. Truly international Euro transactions, involving at least one bank outside the Euro Area, represent a smaller percentage. When considering only international transactions, the Euro’s share diminishes considerably, placing it among secondary currencies like the British pound and the RMB, rather than a direct competitor to the dollar.
While the Euro Area and the European Union boast substantial trade volumes, a significant portion occurs internally. When focusing on trade with nations outside these blocs, the ratios of trade to GDP become less pronounced compared to the United States and China. This underscores the unique strength of the dollar despite the Euro’s backing by a robust economy and sophisticated financial markets.
China has adopted a different strategy to promote the RMB’s international use, capitalizing on the desire of many countries to reduce their reliance on the dollar, particularly in light of its increasing use in financial sanctions. China’s approach involves maintaining control over capital account transactions and leveraging its position as a leading trade and investment partner.
By fostering bilateral currency swap agreements and developing robust payment systems like CNAPS and CIPS, China facilitates RMB settlements outside of SWIFT’s purview. Consequently, China has significantly increased the use of RMB in its cross-border transactions, while the dollar’s share has declined. The International Monetary Fund (IMF) has also observed a substantial rise in RMB usage in cross-border payments across various countries.
Furthermore, the growing use of local currencies in bilateral trade, often involving the RMB, further fragments the global payment system and contributes to the underrepresentation of RMB in SWIFT data. The direct use of CIPS for RMB payments, bypassing SWIFT messaging, adds another layer of underestimation.
The global payment landscape is evolving towards fragmentation. While the dollar reigns supreme in multilateral transactions, secondary currencies, including the Euro and RMB, play significant roles. The rise of bilateral local currency settlements, driven by factors like geopolitical tensions and the desire to mitigate reliance on the dollar, contributes to this fragmentation. This trend, especially the growing use of local currencies like the RMB, might compromise efficiency but reflects a preference for reduced vulnerability to financial sanctions.