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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
Please direct distribution queries to
Violet Lee +65 68785281 violetleeyh@dbs.com
• RCEP’s scale could boost RMB use
beyond direct Sino-transactions
• Rising export similarity between China
and regional peers incentivizes RMB
invoicing to stabilize relative prices
• RMB’s increasing stability and energy
use strengthen anchor currency case
• Expanding offshore liquidity through
currency swaps could enhance RMB
appeal, filling dollar gaps
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
tariff cuts and other incentives, China's imports
and exports with RCEP members soared to
$1,946bn in 2022, accounting for one-third of
the nation’s total trade.
While RCEP has been heralded primarily as a
means for China to increase RMB settlement in
direct trade with partner countries, its
enormous scope enables far-reaching RMB
adoption beyond bilateral exchanges. Growth
in so-called “third-country” use of the RMB—
where non-Chinese entities use the Chinese
currency to transact business with one
another—is essential to elevating the RMB's
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
electrical machinery and equipment to Asia, the
US and Western Europe (Lev, 2020).
Our RCA analysis supports the idea that China
and other regional economies are developing
increasingly similar export mixes. In
undifferentiated markets, even small price
differences can significantly impact market
share, leading companies to invoice in the
dominant currency to stabilize relative prices.
For example, slight currency fluctuations could
disadvantage companies against Chinese
competitors in the electronics industry, which
make up a significant portion of exports from
China (44% of total exports), Vietnam (31%),
and Thailand (46%). Therefore, firms in these
countries are incentivized to invoice in RMB to
stabilize relative prices.
China, Thailand & Vietname export
breakdown by product (%)
Mach and Elec Textiles and Clothing
Metals Plastic or Rubber
Transportation Stone and Glass
Food Products Others
44.4 46.0
31.2
China Thailand Vietnam
Source: WITS, DBS
This trend is reinforced by the proliferation of
"China+1" strategies, where companies
establish secondary production bases beyond
China due to trade tensions and supply chain
disruptions. Countries like Vietnam, Thailand,
and Malaysia have introduced tax incentives
and other policies to attract overseas
investment from companies looking to
establish additional manufacturing hubs.
April 25, 2023
Huawei, Lenovo, Haier, Nike, and Foxconn are
among the multinational companies that have
shifted manufacturing to Southeast Asia from
China over the past few years.
Such adjustment is evident in value-added data,
with the share of imported content from China
in Vietnam's exports rising from 4% in 2000 to
20.3% in 2021. This suggests that while some
parts of the value chain are relocating from
China, companies may still retain Chinese
suppliers for certain inputs due to cost and/or
efficiency considerations. The US trade data
helps shed more light. China’s share of US
manufactured imports fell 5%ppts between
2018 and 2022, while imports from other Asian
developing countries rose equivalently.
Especially large increases were seen in
semiconductors, computer accessories, and
telecommunication equipment – categories
where US imports from China declined.
Asia countries contribution to US
manufactured goods import
China Developing Asia
28.2% 27.8%
22.5%
15.2%
10.1%
8.3%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: US Census, DBS
The upshot is that when companies diversify
regionally while keeping China included,
countries tend to specialize in producing
components and intermediate goods that
complement China's manufacturing. This likely
increases the similarity of China/ASEAN's
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
the RMB.
Accelerating the transition - RMB stability
Improving exchange rate stability bolsters
RMB’s appeal, too. Currency stability is
essential for businesses choosing a currency for
trade payments. A stable and low-volatility
currency reduces revenue and cost fluctuations
resulting from exchange rate movements,
facilitating financial projection. The RMB's
increasing stability—with USD/CNY volatility
declining to around 5.4% in 2016-2022, lower
than major currency pairs—makes it an
appealing choice. At the onset of the COVID
pandemic in early 2020, regional currencies
declined steeply against the dollar. The RMB
saw pressure but fared better than its
counterparts. Policies such as adjusting foreign
exchange reserve requirements and the
counter-cyclical factor have buttressed RMB
stability.
3M implied volaility
18 USD/CNH EUR/USD USD/JPY
anecdotal evidence points to rising RMB usage.
Recently, China completed its first purchase of
imported LNG priced in RMB through the
Shanghai Oil and Gas Trading Centre platform.
Approximately 65,000 tonnes of LNG imported
from the United Arab Emirates were transacted
in the deal. Meanwhile, the pivot to RMB-
denominated oil and gas contracts with China
has propelled Russia from outside the top 15
largest RMB offshore trading hubs in 2021 to
the 5th largest in February 2023. Strengthened
China-Saudi ties also increase the prospects of
RMB in oil pricing. China purchases over a
quarter of Saudi oil exports. Pricing even some
of this in RMB could spur the development of
"petroyuan", stabilizing the currency and
supporting wider acceptance.
Top 15 offshore RMB economies
(%, Feb 2023)
73.29
Clearing centres
Non clearing centres
5.09
4.25
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
affiliates across the region and offered forex
services for domestic firms and banks, working
to develop forex markets for RMB pairs with
Southeast Asian currencies.
Beijing has established bilateral currency swap
agreements with nations spanning the region,
with the stated objective of facilitating use of
the RMB in trade invoicing. Access to the RMB
swap not only allows the recipient country to
finance any deficit in current and capital
account transactions with China, but also
settle trade with non-China counterparties.
Doubling down on these initiatives by swelling
offshore liquidity via additional swaps could fill
the dollar liquidity gaps as the Federal Reserve
tightens, further enhancing the RMB’s allure.
For China, swaps diversify reserves by
exchanging RMB for foreign currencies
investable in non-US sovereign bonds. With
outstanding swaps comprising only 20% of
China's USD3.1tn forex reserves, potential to
expand remains significant.
April 25, 2023
Conclusion
In sum, RCEP provides China an essential
platform to motivate broader third-party usage
of the RMB. As regional economies integrate
while preserving close ties to China, the
incentives for adopting a stable regional
currency for settling trade beyond direct Sino-
transactions are growing. China’s dominant role
in regional trade and supply chains alongside
RMB’s increasing stability have enabled its rise
as an option for regional and third-party
payments.
The recent proposal by ASEAN to reduce dollar
reliance represents a propitious opportunity
to promote greater RMB use. Beijing could
capitalize on this by highlighting RMB invoicing
benefits such as lower transaction costs and
reduced currency risk, and by offering
incentives for ASEAN countries to adopt RMB.
Additionally, as China strengthens economic
ties with ASEAN countries through policies like
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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