International acceptance of the yuan faces headwinds

SWIFT, the Society for Worldwide Interbank Financial Telecommunication, reports a significant drop in international use of the yuan. In December, only 1.7 % of international bank payment transfers were denominated in yuan, down from 2.3 % a year earlier. Use of the yuan has also decreased in China's foreign trade payments. As an invoicing currency in China's exports and imports, the yuan's share has declined from an average share of 25 % in 2015 to just over 10 % in recent months. In December, yuan deposits fell by a record amount in Hong Kong. The level of deposits is now at roughly half the peak levels of 2014 and 2015.

There are several reasons for the drop in international use of the yuan. First, the yuan's exchange rate has depreciated and the pressures for a weak yuan persist, encouraging people to hold on to other currencies. Second, China has tightened its capital controls in recent months to calm depreciation pressure on the yuan, thereby restricting opportunities to use yuan. Third, the PBoC last summer stiffened the offshore yuan deposit reserve requirement, which has meant that more offshore yuan have had to be repatriated to the People's Bank of China. While trying to stabilize the yuan's exchange rate, it seems that the government has postponed efforts to make the yuan a major international currency.

The imbalance in services trade, in contrast, favoured the US. American trade figures value 2015 services exports to China at $48 billion and services imports from China at $15 billion. Over half of services exports from the US to China involved Chinese spending on travelling and living in the US, of which nearly half is study in the US. China is the largest consumer of US travel exports. In 2015, China accounted for 14 % of total foreign travel spending in the US and 32 % of study-related travel.

Many US businesses operate in China. In 2014, the total turnover of US firms operating in China were $341 billion and they employed 1.7 million people (5 % of the turnover of US companies operating outside the US and 12 % of the labour force). Rhodium Group estimates that during 1999–2015, US firms invested a total of $228 billion in FDI in China. This is significantly more than the FDI stock of $75 billion in China reported by the US official figures for 2015.

China's foreign direct investment in the US in recent years has also risen rapidly. The Rhodium Group reports that last year the US was the top destination for Chinese FDI. The value of FDI tripled from the previous year to $46 billion. For the period 2000–2016, the cumulative value of FDI amounted to $109 billion. Over 70 % of investments were made by privately owned Chinese firms. Rhodium estimates that at the end of 2015, just under 2,000 Chinese-owned firms operated in the US, directly employing over 90,000 persons.

Chinese firms have successfully raised capital in the US. In January, the NASDAQ and New York stock exchanges had 130 listed Chinese firms with a combined market capitalisation of over $900 billion (3 % of the exchanges' market cap).

Economic relations between the countries has diversified and deepened in recent years. During his campaign, president Trump expressed considerable discontent for the US trade imbalance with China. Since taking office two weeks ago, he has continued to decry globalisation and measures to promote global trade. If this anti-China rhetoric is translated into concrete constraints on trade and business, it would have profound economic impacts for both countries.