Dollar trade finance dips as demand for local currencies rises: JPMorgan's Zhang

Currency trends have been very interesting over the last few years, specifically in trade finance, where the bank has observed a mild decrease in US dollar usage, Charley Zhang, head of trade and working capital, APAC at JPMorgan, said in a virtual interview.

“Notably, US dollar trade finance has experienced declining momentum in the last two years, particularly in the Asia-Pacific region. In response, we have seen increasing demand for domestic or local currency trade finance options to fill this gap," Zhang said, adding that this applies only to trade finance; for settlements, the US dollar remains dominant.

Zhang said that compared to most Asian currencies, the US dollar remains expensive, having maintained its strength over the past two years. “While the rupee is currently also expensive, I do understand that this reflects India's efforts to combat inflation," he said.

The rupee depreciated 2.9% against the dollar in 2024, as per data from Bloomberg. In the near-term, the dollar is expected to strengthen further under incoming US president Donald Trump.

Read more: What a weakening rupee means for India – and your portfolio

There has been a significant use of the Chinese Yuan over the past two years, said Zhang, adding that given the interest rate differentials, there is a preference for using Chinese Yuan or Japanese Yen as financing currencies at the back end. “A substantial interest rate gap exists between China and Japan compared to the US."

That said, as far as global payments are concerned, the US dollar is still the most-used currency. In November 2024, the Chinese Yuan moved one position up to the fourth most active currency for global payments by value, with a share of 3.89%, according to data from secure financial messaging service provider Swift. The dollar’s share as a global payments currency stood at 47.7% in November, up from 47.1% a year earlier.

Zhang said that due to covid-19, geopolitical concerns and interest rates, countries in the Asia Pacific region have changed their behaviour and diversified their trade. This, he said, is a notable shift, and one which has gained traction in the last few years.

“We are observing increased focus and growth in intra-Asia trade. India plays a crucial role in this, especially when considering what is known as the ‘China-plus one’ strategy," he said.

In fact, according to an article by two McKinsey and Company partners in September, Asia is now the world’s second-most integrated trade region, after the European Union. In 2022, nearly 57% of the value of Asia’s trade originated within the region, up from 54% in 2000, it said.

China-plus-one refers to the strategy of global businesses to cut reliance on manufacturing in China and diversify in other parts of the world. India has tried to capture these opportunities through its production-linked incentives or PLI.

Mint reported on 25 November that while the government disbursed about ₹10,000 crore in FY24 under various PLI schemes, disbursements in FY25 were under ₹1,000 crore, citing data from the department for promotion of industry and internal trade under the commerce ministry.

“Furthermore, a growing number of multinational manufacturing and technology companies have expanded into India and some Asean countries. Many of these technology companies have ambitious expansion plans for the Indian market," said Zhang.

In July 2022, RBI approved an arrangement for domestic traders to settle imports and exports in rupees. Under the mechanism, Indian importers will make payments in rupees, to be credited to the Vostro account of the correspondent bank of the partner country. Similarly, Indian exporters will be paid the export proceeds in rupees from the balances in the Vostro account of the partner country.

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“For any currency to gain significance in international trade, it typically takes considerable time. For instance, both the Japanese Yen and Chinese Renminbi took years to achieve meaningful volumes in international trade transactions, with a portion of their international trade now taking place in their respective currencies," said Zhang.

He said that India has now gained stronger leverage in the global trade landscape; the country plays a crucial role in global services trade, with a number of companies establishing their global capability centres (GCCs).

“This is a sector to watch out for, as certain services provided by overseas GCCs can potentially be paid for in Indian rupees," said Zhang.