Cheaper funding, stronger EM ties are boosting yuan’s appeal in trade finance
The yuan’s funding costs for trade finance are about 3 percentage points lower than loans priced in the US currency, Standard Chartered says
As a result, markets in Southeast Asia, Africa and the Middle East have been experiencing double digit growth rate in yuan-based trade finance this year, said Karen Ng, managing director and head of China opening and yuan internationalisation advisory at the UK banking group.
“Demand for yuan in trade finance is set to grow further in the coming years,” she said in a media briefing in Hong Kong on Friday. Many of the bank’s corporate clients in Singapore, Malaysia, Indonesia and Africa are borrowing yuan to settle trades with their Chinese counterparts, she added.
The yuan’s appeal as a funding currency is not at risk, even if the Federal Reserve is poised to start cutting its target rate as early as next week. Borrowing costs in yuan are still more than 3 percentage points below US dollar-based funding for trade finance, Ng said.
For example, the three-month Shanghai interbank offered rate stood at about 1.85 per cent last week, according to China Foreign Exchange Trade System, while similar-tenor US dollar London interbank offered rate cost 5.2 per cent.
“These yuan borrowers are not betting on foreign-exchange gain but for real business demand as they need to purchase raw materials or other equipment from China,” Ng added.
