Yuan swiftly overtaking euro in trade

Opening up of financial sector and internationalization buoying use

China's yuan has surpassed the euro to become the world's second-most widely used currency in global trade finance, according to data released by the Society for Worldwide Interbank Financial Telecommunication.

Analysts said the opening up of China's financial sector and the broader internationalization of the yuan has increased the use of the currency.

The yuan captured an 8.66 percent share of letters of credit and collections in October, while the euro's was 6.64 percent, Belgium-based financial-messaging platform SWIFT said in a statement.

The yuan's presence in global trade finance has grown significantly in the past two years.

In January 2012, the yuan's share of global trade finance was only 1.89 percent to the euro's 7.87 percent, according to SWIFT data.

The Chinese mainland, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance, SWIFT said.

"The renminbi is clearly a top currency for trade finance globally and even more so in Asia," according to Franck de Praetere, SWIFT's Singapore-based head of payments and trade markets for Asia Pacific.

Hong Kong is the largest yuan deposits pool outside the Chinese mainland with a record 782 billion yuan ($128 billion) in October. The People's Bank of China, the central bank, announced agreements earlier this year to start direct currency trading between the yuan and the British pound, as well as the Singapore dollar.

The payment value of the yuan also has been rising. Daily yuan transactions jumped from $34 billion in 2010 to $120 billion in April 2013, making it the ninth most-traded currency in the global market system, according to a September report by the Basel, Switzerland-based Bank for International Settlements.

China recently concluded a currency swap deal with the European Central Bank. Driving the deal short-term was the relaxation of personal yuan conversions, said a note from DBS Bank (Hong Kong) Ltd.

The yuan has been seeing a greater role in global trade and investment, said analysts.

"The relaxation or removal of the 20,000-yuan daily cap on personal renminbi conversion could alter the picture in 2014," said Chris Leung, DBS Bank (Hong Kong) Ltd's executive director and senior economist for group research.

"Personal yuan wealth management products would flourish initially, and corporate usage of the yuan would gradually pick up as the size of the yuan pool in Hong Kong increases and yuan product innovation advances," he said.

In the past quarter, some 40 percent of companies in Hong Kong surveyed by DBS said they expect yuan trade settlement to reach 30 percent of their total trade settlement within five years.

Authorities have loosened controls on exchange rates and borrowing costs, said Yi Gang, deputy governor of the central bank at a recent conference.

On Monday, the central bank released guidelines for financial support for the China (Shanghai) Pilot Free Trade Zone, which said that institutions in the FTZ may borrow funds from overseas. Banks in Shanghai can conduct yuan cross-border settlements for current accounts and direct investment businesses.

"We think the guideline reflects the central bank's long-held strategy of pushing for financial reforms whenever and wherever possible, and to force reforms on the domestic financial sector through opening up," said Jian Chang, an analyst with Barclays Research in a recent note.

"It also highlights the continued commitment of the central bank to push for financial liberalization, particularly yuan convertibility under the capital account, as well as interest rate liberalization."

The yuan has appreciated 2.3 percent against the dollar in 2013, the best-performing currency in Asia, according to Bloomberg.