RMB Rises Sharply on SWIFT Breakthrough

The recent surge of the Chinese yuan (RMB) in the international finance arena has caught the attention of economists and investors alike. In a remarkable turnaround, the RMB has now overtaken the euro to become the second-largest currency used for financing globally. This shift highlights not only the yuan’s growing acceptance on the world stage but also its escalating relevance in international trade and finance.

Fresh reports released by Swift indicate that the yuan's share of global payments has risen significantly, positioning it as the fourth most active currency worldwide, surpassing the Japanese yen. This upward trajectory has been bolstered by a host of favorable economic data and developments, reflecting confidence in China’s recovery and growth amidst global uncertainties.

From the beginning of the month, the yuan's exchange rate showed a formidable rise from 7.15 to an impressive 7.0876 against the US dollar, demonstrating a cumulative gain of 629 points. The implications of this movement go beyond mere numbers; it underscores the increasing confidence in the Chinese economy and the effectiveness of its policies aimed at stimulating growth.

To contextualize just how far the yuan has come, we can compare its current payment share of 4.6% with the mere 0.1% it held in 2010. This meteoric rise – a staggering 46-fold increase over the past thirteen years – showcases the yuan's newfound status among the leading currencies globally. For comparison, the yen currently holds a share of 3.41%, meaning the yuan not only took the lead but also expanded its margin by nearly 1.2 percentage points.

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Interestingly, there was a moment back in December 2021 when the yuan also surpassed the yen, reaching a slightly higher share of 2.7% against the yen's 2.58%. However, this lead was short-lived as the yen rebounded, placing the yuan back in the fifth position for a period of time. Just when it seemed like the yuan might see another setback – dipping to 3.6% in October – it surged again in November, reflecting an exceptional leap to 4.6%.

The factors contributing to this sudden advancement are intricately linked to broader economic fundamentals, particularly those within China. Recent statistics from the National Bureau of Statistics showed an impressive annual profit increase of 29.5% among large-scale industrial enterprises in November. This growth indicates a robust recovery trajectory post-COVID, recovering from a slowdown earlier in the year where profits had plummeted. Cumulatively, from January to November, the profit decline was reduced from 4.4% to a mere 3.4%, illustrating the strengthening resilience of the Chinese economy.

Additional data on logistics further reinforce this point. Logistics performance is on the rise, reflecting recovery in industrial production and consumer sectors, with logistics services experiencing a 5% increase in November alone. If we zoom in on just the month of November, we see an impressive year-on-year growth rate of 6.7%, showcasing strong demand across various sectors.

In contrast, Japan finds itself in a different scenario despite a slowly increasing payment share for the yen. The pace of this growth, however, is notably slower than that of the RMB. The depreciation of the yen this year has also drawn attention, with exchange rates fluctuating, notably dropping below 150 yen per dollar at one point. Such instability is partially linked to Japan’s wavering economic policies, particularly concerning its relationship with US bonds and the broader discussion about de-dollarization.

For instance, Japan exhibited a peculiar trend from June to August, where there was a continued increase in US bond buying, only to abruptly sell off in September, aligning with broader international sentiment. However, surprising many, October witnessed Japan purchasing an additional $11.8 billion of US bonds, suggesting a lack of coherent strategic direction in its approach.

The Japanese economy has experienced similar turbulence. The Bank of Japan (BOJ) has been actively attempting to stimulate inflation, which for years failed to cross the 2% threshold. It has only recently achieved a breakthrough, occasionally even hitting 3%. Interestingly, this uptick in inflation is not solely attributed to domestic monetary policies but rather the result of internationally driven inflationary pressures.

This scenario has led the BOJ to become increasingly cautious, torn between the necessity of interest rate hikes to curb inflation and the fear that such actions could abruptly unleash deflationary pressures again. The ongoing uncertainty surrounding monetary policy may shed light on why Japan lacks a more defined strategy for its economic future.

Consequently, the international community’s confidence in the yen appears significantly less favorable compared to that of the yuan, creating a backdrop for more nations to favor the RMB for international transactions. This increased preference is catalyzing the yuan’s ascendance toward becoming a major player in the global currency landscape.

In summary, the swift rise of the renminbi can be attributed to a combination of robust economic fundamentals, logistical advancements, and a clear contrast with the current Japanese economic outlook. As more countries align with China in their trade practices and payment systems, the future of the yuan as a leading global currency seems destined for further advancements.