China’s ‘trinket town’ at center of push for renminbi trading

In the Chinese city of Yiwu, the world’s largest wholesale market for small manufactured goods, socks exporter John Zhu is buoyed by a growing number of Russian merchants willing to settle their bills in renminbi.

“Russia’s break with the West has left the country with no choice but to rely on the renminbi to keep its economy afloat,” Zhu said. “We are the beneficiaries of the trend.”

With its 75,000 stores, Yiwu is nicknamed China’s Trinket Town, the center of a multi-billion dollar trade in everything from Christmas decorations to toys and umbrellas to pencils.

It is also at the center of a decades-long experiment to internationalize the renminbi as Beijing seeks to strengthen the world’s second-largest economy’s role in the global financial system. While progress has been slow, more people are settling contracts in renminbi as Moscow was cut off from dollar funding by Western sanctions following its invasion of Ukraine, traders in Yiwu said.

Annual renminbi trade settlement in Yiwu has increased fivefold since 2019, according to official figures, reaching nearly Rmb56.5bn ($8bn) last year. This far outpaced the national average, which increased by more than 80 percent over the same period.

“Yiwu is leading the pack in China’s efforts to make the renminbi an international currency,” said Dan Wang, chief economist at Hang Seng Bank China.

Last year, one-tenth of trade in the export hub was settled in Chinese currency, with the dollar accounting for more than 80 per cent, according to official figures. China’s export-oriented renminbi trade deal accounts for less than 7 percent of total exports, while Yiwu accounts for about 12 percent, said an adviser to the central government on foreign policy.

Beijing has encouraged the use of the renminbi and by the end of last year had signed currency swap agreements with 40 countries, including Argentina and Brazil. The swap agreements allow central banks to provide renminbi liquidity to commercial banks in the event of a shortage, helping boost confidence among companies wary of trading in China’s currency.

Several factors have influenced the increasing use of the renminbi in Yiwu, not all of which can be easily replicated.

Yiwu was one of the first cities in China to allow individual traders to settle large cross-border deals in renminbi. Most cities have an annual limit of $50,000. Given Yiwu’s reputation for cheap goods and flexible terms, helped by the fact that wholesalers don’t pay either corporate tax or market rent, exporters have enough bargaining power to request settlement in renminbi. Is.

“When you only have one place to buy something, how does the seller settle the transaction,” said James Wu, a Yiwu-based furniture exporter who last year began accepting renminbi payments from Middle Eastern customers. The demand was started.

Traders said Yiwu has long had strong trade ties with emerging economies, which are more open to dealing in renminbi.

Senegalese trader Mouhamadou Poay largely avoids the US dollar, settling most of his trading in renminbi. “I can’t say that the renminbi is going to replace the US dollar,” said Poye, who buys Chinese electronics and medical equipment in Yiwu to sell in his native Senegal. “But the dollar transaction volume is getting smaller and smaller year by year.”

However, analysts caution that limited offshore reserves and China’s tighter capital controls will limit adoption of the renminbi. “The institutional support is not strong enough for the renminbi to go global,” said Tan Xiaofen, a finance professor at Beihang University in Beijing.

To encourage greater global use, China would need to give up control over the renminbi’s exchange rate and capital controls, allowing the currency to circulate freely with the dollar. But policymakers respect those controls and show little willingness to give them up.

According to a Beijing-based adviser to the People’s Bank of China, many foreign central banks have hoarded their renminbi reserves for emergencies such as repaying foreign debt. “Some policy makers in developing countries do not want to make full use of the offshore renminbi, even though local traders are willing to do so,” the person said.

The lack of overseas renminbi settlement means that many Yiwu merchants use underground money shops, which exchange currencies such as West Africa’s CFA franc for renminbi at low cost to facilitate trade.

Furniture exporter Wu said a quarter of its renminbi sales were paid through third-party brokers.

Such systems have their disadvantages. Authorities in recent years have frozen thousands of bank accounts belonging to Yiwu merchants over money laundering risks, according to local lenders and state media reports.

Growing trade with Russia in the wake of the Ukraine conflict could also bring up compliance issues. “If we get caught by the US government for having a Rmb 200,000 trade deal with Russia that breaks sanctions rules, we could get a fine of Rmb2bn,” the official said.

Other constraints are more prosaic.

Socks exporter Zhu, back at his stall in the sprawling Yiwu International Trade City, said he stopped seeking renminbi payments from an Ethiopian customer this year because a lack of currency reserves meant he had to wait longer to receive renminbi Had to do

“I’m not going to wait an extra three weeks to get renminbi when I can get paid in dollars right away,” he said.