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DBS Focus
RCEP and RMB’s “third-party” use
Mainland China/ Economics/Monetary/Rates

DBS Group Research April 25, 2023

30Nathan Chow
Senior Economist / Strategist Asia's robust economic growth this year
presents China with a pivotal opportunity to
expand the RMB’s regional influence through
the Regional Comprehensive Economic
Partnership. Covering 30% of global GDP and
27% of merchandise trade, RCEP is the world's
largest trade agreement. By capitalizing on
Please direct distribution queries to
tariff cuts and other incentives, China's imports
Violet Lee +65 68785281 violetleeyh@dbs.com and exports with RCEP members soared to
$1,946bn in 2022, accounting for one-third of
the nation’s total trade.
• RCEP’s scale could boost RMB use
While RCEP has been heralded primarily as a
beyond direct Sino-transactions
means for China to increase RMB settlement in
• Rising export similarity between China direct trade with partner countries, its
and regional peers incentivizes RMB
enormous scope enables far-reaching RMB
invoicing to stabilize relative prices
adoption beyond bilateral exchanges. Growth
• RMB’s increasing stability and energy in so-called “third-country” use of the RMB—
use strengthen anchor currency case where non-Chinese entities use the Chinese
• Expanding offshore liquidity through currency to transact business with one
currency swaps could enhance RMB another—is essential to elevating the RMB's
appeal, filling dollar gaps international prominence and cementing its
status as the dominant regional currency.

GDP growth forecasts (%) The dollar’s dominance


2022 2023F The dollar reigns supreme in third-country
5.7
5.5
transactions today, representing 40% of global
4.6 trade invoicing despite the US comprising just
10% of world trade. Nearly half of all European
3.3 Union imports are invoiced in dollars, even
3.0
though the US accounts for only 12% of EU
2.1 imports. The greenback's popularity extends far
1.5 beyond trade, with huge amounts of US dollar
1.2 1.2
0.9
banknotes held abroad and the dollar serving as
the dominant currency for quoting financial
China ASEAN Japan Eurozone US products worldwide.
Source: Bloomberg, DBS

Refer to important disclosures at the end of this report.


RCEP and RMB’s “third-party” use April 25, 2023

Extra-EU imports by invoicing currency, 2020 RCEP remaking the landscape


Euro Non-euro EU currency
USD Other currencies Abundant theoretical literature has examined
Unknown how economic factors influence the choice of
6.8 7.2 6.2 6.7
5.3 3.7 0.0 6.2 invoicing currency. Two key determinants are
(1) strategic price-setting complementarities,
42.3
48.1 45.0
where exporters aim to keep prices stable
79.9
relative to competitors, and (2) international
input-output linkages, where exporters along
38.2 45.4 40.3
the supply chain seek to limit deviations
13.6
between marginal costs and marginal revenues
Total - all Primary goods Petro and Manufactured
products excl. petro and related goods to stabilize profit margins. A recent study by
related materials
materials
Mukhin (2021) develops a quantitative general
Source: Eurostat, DBS equilibrium model that incorporates these
determinants. It suggests that a large market
In comparison, the RMB plays a negligible role
creates incentives for foreign suppliers to
by all measures. It comprises just 7% of foreign
invoice in local currency, which then propagates
exchange market turnover, disproportionately
to other countries and products.
low given China's outsized role in global trade.
RMB deposits in major offshore markets This line of reasoning could be applied to China.
represent a mere 0.5% of onshore deposits. China is the world’s largest exporter,
Less than 2% of foreign corporate debt is RMB- comprising roughly 20% of global exports. It
denominated versus 63% for the dollar. RCEP possesses a vast network of suppliers enabling
could help alter this status quo. mass manufacture at low costs due to factors
such as economies of scale and streamlined
Breakdown of foreign currency debt issuance rules. Its sheer size incentivizes foreign
USD EUR GBP JPY RMB Other
suppliers in the RCEP bloc to invoice in RMB to
100%
90%
align their prices with China-based
80% competitors. This stabilizes RMB prices of
70% inputs for Chinese producers, prompting them
60% to invoice exports in RMB. Government support
50% such as tax rebates could further encourage
40% local currency invoicing. Over time, this could
30% increase the share of inputs invoiced in RMB for
20%
producers outside China, inducing them to
10%
invoice non-China exports in RMB as well.
0%
1999 2002 2005 2008 2011 2014 2017 2020 Aligning invoice currencies across value chains
Source: Dealogic; Refinitiv; DBS mitigates volatility from currency mismatches.

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RCEP and RMB’s “third-party” use April 25, 2023

Accelerating the transition - export similarity RCA Radar

The transition may be gradual given the dollar’s Commodities


Food, live animals
established dominance. Yet we reckon certain
Misc. mfg.
factors could help hasten the process, such as articles Beverage, tobacco
the rising similarity of exports. Over the past
decade China and major Asian countries have
Electrical China Crude
increasingly similar export mixes, shifting machinery, materials, ex
transport fuels
towards higher value-added products. We equipment
Mineral fuels,
examine this homogenization by using the Mfg goods lubricants

Revealed Comparative Advantage indices


Chemicals Animals,
(RCA), which is based on the Ricardian vegetables oils

comparative advantage concept for calculating


a country’s relative competitiveness in a
product based on trade flows. A country is said Commodities Food, live animals
to have a revealed comparative advantage if
Misc. mfg.
the value exceeds unity (see appendix). articles Beverage, tobacco

The plots presented below show China and


major Asian countries demonstrated strong Electrical
South
Crude
Korea
machinery, materials,ex
trade competitiveness in sectors such as transport fuels
equipment
electrical machinery and parts, critical for Mineral fuels,
Mfg goods
lubricants
modern industries like telecommunications,
transportation, and consumer electronics, as Chemicals Animals,
vegetables oils
well as renewable energy technologies such as
solar and wind power. Similarly, they have high
RCA scores in the office and telecom equipment
Commodities
sector, which includes communication Food, live

equipment, computers, and peripheral Misc. mfg.


articles Beverage, tobacco
equipment. These sectors are critical for the
digital economy and the development of smart
cities. Electrical Vietnam Crude
machinery, materials,ex
With their strong RCA scores in these sectors, transport
equipment
fuels

China and its regional peers are well-positioned Mfg goods


Mineral fuels,
lubricants
to compete with each other in the global
market. Our findings are consistent with prior Chemicals Animals,
vegetables oils
studies confirming the increasing resemblance
of Chinese exports with those of neighbouring
nations. These countries specialize in exporting
processed consumer and capital goods such as Source: UNCTAD, DBS
Products plotted are SITC revision 3 product groups at the 3-digit level. The
machinery & mechanical appliances, revealed comparative advantage of exported products are indicated in the
plot for all product groups which have an RCA>1.

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RCEP and RMB’s “third-party” use April 25, 2023

electrical machinery and equipment to Asia, the Huawei, Lenovo, Haier, Nike, and Foxconn are
US and Western Europe (Lev, 2020). among the multinational companies that have
Our RCA analysis supports the idea that China shifted manufacturing to Southeast Asia from
and other regional economies are developing China over the past few years.
increasingly similar export mixes. In Such adjustment is evident in value-added data,
undifferentiated markets, even small price with the share of imported content from China
differences can significantly impact market in Vietnam's exports rising from 4% in 2000 to
share, leading companies to invoice in the 20.3% in 2021. This suggests that while some
dominant currency to stabilize relative prices. parts of the value chain are relocating from
For example, slight currency fluctuations could China, companies may still retain Chinese
disadvantage companies against Chinese suppliers for certain inputs due to cost and/or
competitors in the electronics industry, which efficiency considerations. The US trade data
make up a significant portion of exports from helps shed more light. China’s share of US
China (44% of total exports), Vietnam (31%), manufactured imports fell 5%ppts between
and Thailand (46%). Therefore, firms in these 2018 and 2022, while imports from other Asian
countries are incentivized to invoice in RMB to developing countries rose equivalently.
stabilize relative prices. Especially large increases were seen in
semiconductors, computer accessories, and
China, Thailand & Vietname export
breakdown by product (%) telecommunication equipment – categories
Mach and Elec Textiles and Clothing where US imports from China declined.
Metals Plastic or Rubber
Transportation Stone and Glass Asia countries contribution to US
Food Products Others
manufactured goods import
China Developing Asia
28.2% 27.8%

22.5%

44.4 46.0 15.2%


31.2

10.1%
China Thailand Vietnam 8.3%
Source: WITS, DBS

This trend is reinforced by the proliferation of 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
"China+1" strategies, where companies Source: US Census, DBS
establish secondary production bases beyond
The upshot is that when companies diversify
China due to trade tensions and supply chain
regionally while keeping China included,
disruptions. Countries like Vietnam, Thailand,
countries tend to specialize in producing
and Malaysia have introduced tax incentives
components and intermediate goods that
and other policies to attract overseas
complement China's manufacturing. This likely
investment from companies looking to
increases the similarity of China/ASEAN's
establish additional manufacturing hubs.
export mixes, reinforcing motivations to
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RCEP and RMB’s “third-party” use April 25, 2023

stabilize relative prices by aligning invoicing in anecdotal evidence points to rising RMB usage.
the RMB. Recently, China completed its first purchase of
imported LNG priced in RMB through the
Accelerating the transition - RMB stability
Shanghai Oil and Gas Trading Centre platform.
Improving exchange rate stability bolsters Approximately 65,000 tonnes of LNG imported
RMB’s appeal, too. Currency stability is from the United Arab Emirates were transacted
essential for businesses choosing a currency for in the deal. Meanwhile, the pivot to RMB-
trade payments. A stable and low-volatility denominated oil and gas contracts with China
currency reduces revenue and cost fluctuations has propelled Russia from outside the top 15
resulting from exchange rate movements, largest RMB offshore trading hubs in 2021 to
facilitating financial projection. The RMB's the 5th largest in February 2023. Strengthened
increasing stability—with USD/CNY volatility China-Saudi ties also increase the prospects of
declining to around 5.4% in 2016-2022, lower RMB in oil pricing. China purchases over a
than major currency pairs—makes it an quarter of Saudi oil exports. Pricing even some
appealing choice. At the onset of the COVID of this in RMB could spur the development of
pandemic in early 2020, regional currencies "petroyuan", stabilizing the currency and
declined steeply against the dollar. The RMB supporting wider acceptance.
saw pressure but fared better than its
counterparts. Policies such as adjusting foreign Top 15 offshore RMB economies
(%, Feb 2023)
exchange reserve requirements and the 73.29
counter-cyclical factor have buttressed RMB Clearing centres
Non clearing centres
stability.
5.09
3M implied volaility 4.25
18 USD/CNH EUR/USD USD/JPY 2.25

16
South Korea
France

Macao

Canada
Hong Kong
UK

Australia

Germany
US

Netherlands
Japan

Belgium
Singapore

Russian Federation

Taiwan

14

12

10

8
Source: SWIFT, DBS
6

4 Accelerating the transition - policy support


2 Continued policy action can further advance the
0 RMB's regional usage. Of the 28 offshore RMB
2015 2017 2019 2021 2023
Source: Bloomberg, DBS clearing banks, 13 are located in Asia-Pacific
including Singapore, Malaysia, Thailand, Japan,
The increasing use of the RMB in energy
and South Korea. They facilitate offshore RMB
settlements could further anchor its value to
trading and cross-border payments through
tangible demand, boosting the case for
onshore forex market access. China’s state-
broader adoption. While data on settlement
owned banks have in recent years launched
currencies in China's energy trade is limited,
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RCEP and RMB’s “third-party” use April 25, 2023

affiliates across the region and offered forex Conclusion


services for domestic firms and banks, working In sum, RCEP provides China an essential
to develop forex markets for RMB pairs with platform to motivate broader third-party usage
Southeast Asian currencies. of the RMB. As regional economies integrate
Beijing has established bilateral currency swap while preserving close ties to China, the
agreements with nations spanning the region, incentives for adopting a stable regional
with the stated objective of facilitating use of currency for settling trade beyond direct Sino-
the RMB in trade invoicing. Access to the RMB transactions are growing. China’s dominant role
swap not only allows the recipient country to in regional trade and supply chains alongside
finance any deficit in current and capital RMB’s increasing stability have enabled its rise
account transactions with China, but also as an option for regional and third-party
settle trade with non-China counterparties. payments.
Doubling down on these initiatives by swelling The recent proposal by ASEAN to reduce dollar
offshore liquidity via additional swaps could fill reliance represents a propitious opportunity
the dollar liquidity gaps as the Federal Reserve to promote greater RMB use. Beijing could
tightens, further enhancing the RMB’s allure.
capitalize on this by highlighting RMB invoicing
For China, swaps diversify reserves by
benefits such as lower transaction costs and
exchanging RMB for foreign currencies
reduced currency risk, and by offering
investable in non-US sovereign bonds. With
incentives for ASEAN countries to adopt RMB.
outstanding swaps comprising only 20% of
Additionally, as China strengthens economic
China's USD3.1tn forex reserves, potential to
ties with ASEAN countries through policies like
expand remains significant. the Belt and Road Initiative, RMB could become
more attractive for both parties. While capital
controls and the dollar primacy remain
hindrances for the RMB, extending its use lies
within reach given RCEP’s collective weight.
Regional prominence may present China’s
clearest path to securing the RMB a place
among elite currencies.

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RCEP and RMB’s “third-party” use April 25, 2023

References
Georgios Georgiadis, Helena Le Mezo, Arnaud
Mehl, Cedric Tille, 2021. Fundamentals vs.
policies: can the US dollar’s dominance in global
trade be dented?
Mukhin, D., 2021. An Equilibrium Model of the
International Price System.
Lev Vlasenko, 2020. Evaluation of the composite
export similarity index on the example of China.

Appendix
THE RCA METRICS - Country A is said to have a
revealed comparative advantage in a given
product i when its ratio of exports of product i
to its total exports of all goods exceeds the
same ratio for the world as a whole:

Where:
P The set of all products (with i∈P)
XAi Country A's exports of product i
Xwi Worlds' exports of product i

Σj∈PXAj Country A's total exports (of all


products j in P)

Σj∈PXwj World's total exports (of all


products j in P)
Source: UNCTAD, DBS

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RCEP and RMB’s “third-party” use April 25, 2023

Group Research
Economics & Macro Strategy

Taimur Baig, Ph.D.


Chief Economist
Global
taimurbaig@dbs.com

Chang Wei Liang Ma Tieying, CFA


FX & Credit Strategist Senior Economist
Global Japan, South Korea, Taiwan
weiliangchang@dbs.com matieying@dbs.com

Nathan Chow Radhika Rao


Senior Economist Senior Economist
China, Hong Kong SAR Eurozone, India, Indonesia
nathanchow@dbs.com radhikarao@dbs.com

Chua Han Teng, CFA Irvin Seah


Economist Senior Economist
Malaysia, Philippines, Thailand, Vietnam Singapore
hantengchua@dbs.com irvinseah@dbs.com

Violet Lee Daisy Sharma


Associate Analyst
Publications Data Analytics
violetleeyh@dbs.com daisy@dbs.com

Eugene Leow Duncan Tan


Senior Rates Strategist Rates Strategist
G3 & Asia Asia
eugeneleow@dbs.com duncantan@dbs.com

Chris Leung Samuel Tse


Chief Economist Economist
China, Hong Kong SAR China, Hong Kong SAR
chrisleung@dbs.com samueltse@dbs.com

Philip Wee
Senior FX Strategist
Global
philipwee@dbs.com

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RCEP and RMB’s “third-party” use April 25, 2023

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research
(forecasts and transformations)
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