iBanFirst Forecast: How will the De-Euroization and the rise of the Chinese Yuan impact Romanian trade companies

The euro’s share in international payments has fallen from 38% to 23%, while the US dollar remains strong at 42%. This reflects the changes in Europe’s energy sector, reduced intra-European trade, and the declining competitiveness of European companies. China’s accelerated growth in the last decades along with yuan’s internationalization trend come sat the expense of Europe and especially the Eurozone as the United States continue to represent 25% of the global GDP.

De-euroization and the rise of the yuan have several implications for Romanian trading companies, according to iBanFirst, one of the leading global providers of foreign exchange and international payment services for companies, present in 10 European countries. In this context, adaptability and effective foreign exchange risk management become key factors for maintaining competitiveness in international markets.

Where has the euro gone?

Since the 2008 financial crisis, there hasn’t been a year without discussions about the decline of the US dollar. The reality is quite different. It’s not the US dollar but the Euro that is gradually losing ground in the international payment market. According to the latest data from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) released at the end of September, the Euro’s share in international payments has dropped from 38% at the beginning of 2023 to 23% currently. In contrast, the US dollar still holds the top position with 42% of global payments. What’s most striking is the speed at which the Euro has lost ground.

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Factors driving the de-euroization trend

Part of the decrease in the Euro’s share reflects Europe’s energy shift following the Ukraine war, that originated from the collapse of Russian gas imports that were paid in Euros. Other factors also come into play such as the reduction in intra-European trade in global exchanges and the reduced competitiveness of European companies, exacerbated by rising energy costs.

The Eurozone, and Europe more broadly, is perceived by non-European investors as a geographically declining area, aging and facing sluggish or, in some cases, recessionary growth. This perception is confirmed by the decreasing capital flows into the Eurozone since the beginning of this year.

The de-Euroization trend that began at the start of the year is likely to intensify in the short term. The Euro is at risk of gradually fading from international finance, challenged by a still-dominant US dollar and a rising Chinese yuan, along with other minor currencies like the Canadian dollar and the Japanese yen. According to iBanFirst, the decline of the US dollar will remain a myth as long as the US economy remains powerful.

How does de-euroization impact Romanian trading companies

The decline in the share of the euro in international payments can impact the activity of Romanian trading companies in several ways:

The Chinese yuan is on the rise

Swift data also show the gradual internationalization of the Chinese yuan. The Chinese currency’s share in international payments has reached a historic high of 3.47%. Of course, this is still relatively low, but the process is well underway, especially due to currency swap agreements with the central banks of China’s major trading partners. Furthermore, in recent quarters, several emerging countries have turned to the yuan as a settlement currency for bilateral trade with China (Brazil, Argentina, Russia, etc.), explaining the recent performance.

“In recent years, Chinese companies are more open to receiving payments in Chinese yuan from their counterparts in Europe. However, Romanian companies are still understanding the benefits and most remain reluctant to replace their US dollar payments mainly due to the uncertainty that the Chinese currency holds. The ones who implement it can negotiate better pricing but financial tools for FX risk hedging remain a must to keep the profit margins at the budgeted levels”, says Alin Latu, Country Manager iBanFirst România.

On the other hand, the speed at which the yuan will establish itself in the long term depends on China’s ability to get its economy back on track. This is a significant point of uncertainty. The post-Covid period seems to be the culmination of a slow structural slowdown in the Chinese economy over the past decade. While in the past, China could stimulate its growth by using credit as a lever, in the new economic landscape, injecting credit would only inflate the speculative bubbles that Chinese authorities have been struggling to deflate since 2010.

Another lever is to devalue the Chinese yuan. This has been discussed by many market participants since the summer. However, not only would this contradict recent actions by Chinese authorities to support the yuan in onshore and offshore markets through the actions of Chinese public banks, but it would also dangerously increase capital flight, as was the case after the failed triple devaluation in August 2015. Furthermore, acting in this way would set back the long-term goal of yuan internationalization for the Chinese government by several crucial years.