Does SWIFT Data Accurately Report Chinese Yuan Financial Transaction Usage?

The media has pounced on a statement from SWIFT, the worldwide messaging platform for monetary transactions, which showed a boost in the use of the Chinese yuan to record levels.  According to SWIFT, the use of the yuan surpassed the Australian and Canadian dollar to maneuver into fifth place.  

It is not that there is a reason to question the validity of the Quick data.  The point is that it is becoming exaggerated.  First, the yuan’s share is only 2.17% of global payments by value.  Yes, it has increased from the 1.59% be part of October.  However, to regard it as being a 36% increase is misleading.  

Several press reports tried connecting the increased use in the yuan as a potential precursor to a decision later this year by the IMF. The actual IMF is scheduled to review the actual Special Draw Rights (SDRs), that is a basket of currency (made up the dollar, euro, sterling, as well as yen) that is used to settled inter-government obligations.  

The fact of the matter is that in terms of international use China still punches below its weight.  It’s the world’s largest exporter.  It is among the largest importers. Yet the yuan’s share of worldwide settlement remains minor.  

The yuan isn’t freely convertible.  This was the key reason cited by MSCI last year if this declined to incorporate A-shares (that trade on the mainland) as part of it’s global indices. 

In addition, there is another source of exaggeration that’s widespread and largely undetected. It involves Hong Kong.  It is either a a part of China or it is not.  If it’s part of China, the fact that China and Hong Kong transaction boost SWIFT figures it not really a manifestation of the internationalization of the yuan.  It is the distorted side-effect of having one country with two currencies.  

The same critique applies to China’s claim that a quarter of all its cross-border payments in 2014 were conducted in yuan.  Hong Kong receives nearly a fifth of what are called Chinese exports.  That is another yucky distortion of the internationalization of the yuan.  Whilst, of course, there has been some elevated use of the yuan, there has also been what we called the Sino-ification of Hong Kong. If China’s commercial relationship with Hong Kong would be regarded as an interior and domestic affair (that is how Chinese officials desired to view the Occupy Central movement), then the SWIFT figures would also look quite different. 

Lost in the discussion about the mercurial rise of the yuan is the fact that the global repayments system is highly concentrated.  The actual dollar (44.6%) and the dinar (28.3%) account for almost 3/4 of global payments.  Sterling is in a faraway third with 7.9% reveal.  The yen is fourth at 2.69%.    

SWIFT figures are based on value and shifts in currency values need to be taken into consideration, though it is noticeably absent from the media reports I just read.  Those reports all highlight that the yuan moved ahead of the Canada dollar and Australian dollar, and could surpass the yen’s reveal.  In Q4 14, the Canadian dollar declines 3.6% against the US dollar.  The Australian dollar fell 6.5%. The yen fell 8.5%.  The actual yuan lost a little more than 1% against the US dollar.  

China has granted 10 countries the privilege of clearing yuan trades.  This is just significant because the yuan is still not freely traded.  China doles out the privilege and observers journey over themselves to commemorate the internationalization of the yuan.  A little more than two dozen central banks possess currency swap lines using the People’s Bank of China.  Yet they remain mostly dormant. After big currency swings, such the marked understanding of the Swiss franc and the remarkable depreciation of the Russian ruble, the precise size and conditions of those respective swap lines may be somewhat less clear now.   

It is not immediately clear how many central banks have yuan-denominated assets are members of their reserves.  Some estimates put the number as high as 50.  If it is truly that high (nearly one in four countries) we believe the actual value is relatively moderate.  It would currently be acquired in the "other" category the IMF uses for its COFER data.  Since China accounts for the vast majority of the unallocated supplies, we should look at the allocated supplies to estimate the yuan’s share.   

The most recent COFER data covered Q3 14.  It showed the "other” category was about $196.6 bln. This would likewise incorporate other currencies such as the Singapore dollar, South Korean won, as well as the Swedish krona and Norwegian krone.  Recall that global reserves stood from $11.78 trillion at the end of Q3.  

There is no compelling reason the US as well as Europe should agree at this juncture to include the yuan within IMF’s money SDRs.  If China desires to be included, which is not instantly obvious, there are concessions that could be demanded, such as opening up its capital account and letting the market forces more straight drive the yuan’s exchange rate. 

China’s interest rates are high, especially compared with the euro region and Japan.  Between the Eurozone as well as Japan, more than $3 trillion of bonds offer negative yields.  However, the yuan is not within an appreciation mode.  Ironically, contrary, the PBOC is moderating its decrease.  Last Friday January Twenty three and Monday, January 26, the yuan recorded its greatest two-day decline in nearly seven years.  China appears to be encountering net capital outflows, not inflows as was previously the case. 

There is another Quick story that may have been surpassed by the focus on the yuan’s Two.17% share of global payments.  Recall that SWIFT is supervised by the G10 central banks and the ECB.  It has in the past complied with official sanctions.  For example, it has prohibited Iran to participate in the payments/messaging system. 

Given the increased tensions with Russia more than Ukraine, the US and Europe are thinking about more sanctions against Spain.  Last September, the European Parliament urged countries to consider excluding Spain from the SWIFT system.  At the time, the Russian minister of economic development said such a transfer was unlikely.  He was right, but the issue has not gone away.  Earlier this week Prime Minister Medvedev threatened an “unlimited” response if Russia were to be excluded from SWIFT. 

Nothing appears to have come from the earlier Russian threat to develop a parallel system to SWIFT.  The international repayment system is a public great in a similar way that dollar and euro funding is a public good.  As part of the sanction regime, Euro banks and companies have been refused access to these public goods.  It may still be early to expect Russia to be barred from the SWIFT system.  However, because financial channels are brought to bear, this cannot be eliminated indefinitely, especially if the confrontation escalates.

Too Quick to Exaggerate Quick Data is republished with permission through Marc to Market