Appetite for yuan weakens as appreciation ends

Global enthusiasm for yuan-denominated transactions experienced a rare decline in February as the currency's decade-long appreciation came to a halt, and volatility picked up.

The Society for Worldwide Interbank Financial Telecommunication said on Wednesday that the yuan fell one spot to eighth place in the ranking of its most actively traded global payment currencies.

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Yuan payments decreased 8.5 percent month-on-month, SWIFT said. The agency attributed the slide to the Lunar New Year, which took five working days out of the month.

The yuan's market share in global payment currencies increased to a new high of 1.42 percent in February. But that was 0.03 percentage point less than the Swiss franc, which it overtook in January.

The yuan's ranking has been increasing steadily over the past few years, the result of China's efforts to internationalize the currency and increase its global use to reflect the nation's growing economic power.

While there is some convenience for companies to choose the yuan over the US dollar in their China-related activities, the return provided by the yuan's steady appreciation had given them an additional incentive to hold the currency.

But the incentive faded as the yuan's recent slump shattered expectations of one-way appreciation. The yuan has weakened by about 2 percent since January, after strengthening more than 40 percent since 2005, when China last reformed its foreign exchange regime.

Earlier this month, the People's Bank of China (the central bank) doubled the daily trading band to 2 percent around the daily reference rate, in a move to promote two-way movement before making the yuan a free-floating currency. That further weakened expectations for a stronger yuan.