As China seeks to gradually internationalise its currency, the growing presence of the renminbi has now become more prevalent in another area in trade finance: letters of credit (LCs).
According to a research note released by the Society for Worldwide Interbank Financial Telecommunication (Swift) on May 29, with a market share of 4%, the renminbi is the world’s third largest currency in the global issuance of LCs by value in April, after the US dollars with 84.4% and the euro at 7%. The yen comes in at 1.9%.
“The news is significant; even more important than its steady climb up the ladder as world payments currency,” said Lisa O'Connor, initiative director for renminbi internationalisation at Swift in the report. “This makes it one of the world’s top three currencies in this space – it’s quite an Olympic achievement.”
LCs is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the bank is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
The usage of renminbi-denominated LCs is heavily concentrated in Asia Pacific, with well over 50% of all LCs in transaction value being sent by banks in China to Hong Kong and nearly 20% moving from China to Singapore.
Not much has changed on the payments front – the Chinese currency remained in 16th position globally in April, with a market share of 0.34%.