In March 2023, the global currency payment data revealed an interesting trend among the top five most active currencies in global paymentsAccording to the latest statistics, while three currencies experienced an increase in their market share, two witnessed a declineThe five currencies that dominate these rankings remain unchanged from February, with the U.Sdollar, euro, British pound, Japanese yen, and Chinese renminbi leading the wayNotably, the renminbi has shown a remarkable increase in its shareHowever, the euro has seen a significant decline in its market share.

One question arises: does the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system accurately reflect the global payment situation for the renminbi? A common perception is that the China International Payment System (CIPS) for cross-border renminbi settlements also relies on SWIFT for its operations

But how credible is this notion?

The U.Sdollar's dominance in international trade remains unchallengedWhile the "de-dollarization" process has been accelerating in countries worldwide over the past year, the dollar continues to play a crucial role, particularly in global trade settlementsCountries have been diversifying their currency usage for settlements, engaging in currency swaps, and employing various strategies to mitigate risks associated with dollar dependency.

Despite the increasing calls for reducing reliance on the dollar, its supremacy persists, particularly in light of the current economic challenges faced by the U.S., which have yet to fully unfoldThe American government has managed to temporarily stave off a banking crisis through strategic acquisitions, thereby preventing a total collapseThis maneuvering allows the dollar to maintain its entrenched position as the world's foremost payment currency.

Additionally, a critical factor contributing to the dollar's strength is the ongoing series of interest rate hikes imposed by the U.S

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Federal ReserveThis has resulted in an appreciation of the dollar, subsequently causing a decline in the value of other currencies, particularly those from Europe and emerging marketsAs a result, the dollar's share in the global payment system has risen significantlyIn March 2023, the dollar's share in the SWIFT payment system increased by 0.64% from February, reaching a substantial 41.74% of the global market.

America's status as the world's largest economy undoubtedly plays a pivotal role in these developmentsThe dollar remains an extension of the post-World War II international monetary system, continuing to uphold its dominant status amid the shifting global economic landscapeAs countries accelerate their de-dollarization efforts, they still find themselves navigating through a labyrinth of American influence, particularly in EuropeConsequently, global trade for commodities predominantly continues to be conducted in dollars.

The dollar’s strength is underpinned by America's economic, military, and financial prowess, allowing it to maintain its status as a global currency

This position enables the U.Sto transfer its internal economic struggles onto the world stage and benefit from global market fluctuations.

It’s crucial to acknowledge the mounting crises currently plaguing the U.Seconomy—namely, inflation, recession, and a banking sector crisisThese challenges are exacerbated by unresolved debt ceiling negotiations, which add another layer of uncertainty to the dollar's futureConsequently, alternative currencies, including the renminbi and yen, have increased their shares within the global framework.

Examining the shares of various currencies paints a nuanced pictureWithin the SWIFT system, the euro, pound, and yen hold the second, third, and fourth positions, respectively, with shares of 32.64%, 6.19%, and 4.78%. Notably, both the euro and the pound experienced declines, dropping by 3.79% and 0.39% respectivelyThe euro's substantial share can be attributed to how SWIFT aggregates payments by sovereign nations or regions, thus inflating its apparent viability.

Trade within European nations is counted as international trade, akin to how interprovincial trade in China would also fall under international settlements, inherently boosting payment volumes

Consequently, as energy imports transition from euro transactions to dollar payments, the surge in dollar settlements becomes increasingly understandable.

The stronger dollar can also be linked to the Federal Reserve’s series of interest rate increases, which have catalyzed a flow of capital back into the dollar, while causing the euro to depreciateThe euro's depreciation diminishes the value of euro-denominated assets—illustrating a trend in which a declining currency directly correlates with a decrease in its share within the payment landscape.

Turning to the pound, its status underwent a transformation post-Brexit, undercutting its influence in EuropeOnce a dominant figure in EU decision-making, the U.K.’s withdrawal marginalized its roleToday, the UK stands only as the sixth-largest economy, having been surpassed by its former colonies such as India.

According to the International Monetary Fund (IMF), the U.K

is projected to be the only G7 nation to face economic contraction in 2023, signaling a potential decline in the pound's valueThis differs fundamentally from the eurozone, indicating an intrinsic risk associated with the British currency.

A considerable shift is noticeable in the rising share of the Japanese yen, which surprised many observers, as it climbed to 4.78% in payment capacity, reflecting a substantial 1.8% riseBut what explains this upward swing in such a short timeframe?

Unlike the shrinking values of the euro and pound, the yen has been relatively strong since the onset of trade tensions between the U.Sand ChinaStarting the year at 120 yen per dollar, the currency appreciates to around 106 yen by May 1stThis strengthening yen has gained favor as a safe-haven asset amidst the depreciation of other major currencies and the tumultuous landscape of the American banking sector, influencing increased yen adoption for trade payments.

Moreover, the unfolding geopolitical dynamics have heightened global economic uncertainty, further solidifying the yen's role as a desirable asset during turbulent times

Additionally, the impending leadership transition within the Bank of Japan has elevated expectations for potential shifts in Japan's loose monetary policy, possibly leading to rate hikes or reduced monetary supply and further solidifying the yen's value in international contexts.

Back to the rising star, the renminbi saw an impressive month-on-month growth of 25.04% in March, cementing its position as the fifth most utilized currency in global payments with a 2.26% shareSkepticism arises, however, as some argue this figure does not reflect China's standing as the world’s second-largest economy, whose GDP accounts for approximately 18% of global totals.

The discrepancy warrants consideration of more than just the SWIFT system's data, leaving out CIPS and its cross-border settlement capabilitiesThe CIPS and SWIFT systems have a relationship that embodies competition and collaboration.

Critics who claim that CIPS should funnel through SWIFT misunderstand the overarching relationship

It is essential to delineate how these systems operate in contextCIPS extends beyond SWIFT's functionality, enabling comprehensive settlement capabilities.

Essentially, CHIPS (Clearing House Interbank Payments System) and CIPS serve parallel functions in their respective domains, forming a foundational basis for broader settlement ambitions in China—signifying a comprehensive system of messaging and clearing.

CIPS is not merely a messaging platform like SWIFT but enhances and includes clearing capabilities akin to CHIPSThus, the assertion that CIPS functions solely through SWIFT is fundamentally flawed, as both systems coexist with a level of interdependence but serve unique purposes.

According to CIPS’s official data, as of March 31, 2023, there were 79 direct participants and 1,348 indirect participants operating within CIPS, showcasing its wide-reaching implications across continents, including extensive representation in Asia and Europe.

The volume of transactions through direct participants speaks volumes, with over 3.342 million transactions and roughly 79.6 trillion yuan conducted as of 2021. This establishes CIPS as a vital player in cross-border renminbi clearing—a role that has only intensified as demonstrated by recent trends.

Understanding the global scope of the renminbi necessitates a broader perspective beyond SWIFT, as CIPS increasingly represents a formidable alternative

It is likely that, when including CIPS data, the renminbi ranks as the second most significant sovereign currency for international transactions, just behind the dollar, while not fully capturing the euro's function across the eurozone.

This year witnesses pivotal advancements for CIPS, with significant transactions such as the first import of liquefied natural gas settled in renminbi between China and France, the completion of initial renminbi loans to Saudi Arabia, and emerging renminbi settlement frameworks with Brazil and Argentina—where Argentina's financial activities alone could exceed 120 billion yuan annually.

Moreover, the renminbi has become the currency of choice in Russia and is now outpacing the euro in Brazil, establishing itself as the second largest reserve currency in that countryHowever, it is crucial to recognize that the journey toward the internationalization of the renminbi remains in its early stages