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The growth of renminbi L/Cs

Recent SWIFT data shows that the Chinese renminbi (RMB) has overtaken the euro as the second most used currency after the US dollar in collections and letter of credit transactions. RMB usage grew from an activity share of 1.89 per cent in January 2012 to 8.66 per cent in October 2013, still ranking substantially behind the US dollar, which remains the leading currency with a share of 81.08 per cent. The RMB overtook the euro, which dropped from 7.87 per cent in January 2012 to 6.64 per cent in October 2013 and is now in third place. The top five economies using RMB for trade finance in October 2013 were China, Hong Kong, Singapore, Germany and Australia. In October 2013, the RMB remained stable in its position as the twelfth payments currency of the world, with a slightly decreased activity share of 0.84 per cent compared with 0.86 per cent in September 2013. Overall, RMB payments increased in value by 1.5 per cent in October 2013, while the growth for all payments currencies was at 4.6 per cent.

Less expensive Chinese L/Cs

In late 2013, China's central bank was considering establishing a trial trading platform that will make letters of credit less expensive for some Chinese businesses. The People's Bank of China was considering establishing the platform within the China Pilot Free Trade Zone in Shanghai to promote trade financing. Once established, the platform is expected to promote the internationalization of the renminbi, as well as Shanghai's role as an international financial centre. The US dollar benefited from a similar trading platform in New York when becoming a global currency. The platform is also expected to reduce the cost of L/Cs for both foreign and Chinese banks and lower financing charges for manufacturers in China. One analyst said that although major Chinese banks have their own trade finance services, the banking system currently lacks the kind of integrated platform envisaged for Shanghai's free trade zone.

EIB aid for Cyprus

The European Investment Bank (EIB) has approved a new financing instrument for Cyprus aimed at making L/Cs and other trade finance instruments better available. Trade finance support worth up to EUR 150m was made available by the end of 2013 to support companies capitalized at up to EUR 10 billion, including small- and medium-sized enterprises. The instrument aims to mitigate transaction and systemic risks of foreign banks writing trade business with Cyprus by providing those banks with guarantees. This would facilitate an export-led recovery for the country and replicates an instrument implemented in Greece, which the EIB says had a positive impact. The EIB guarantees for Cyprus are expected to support a volume of transactions of some EUR 300m to EUR 450m per year. EIB President Werner Hoyer said that the instrument aims "to maintain the capacity of the Cypriot banking sector to provide a sufficient volume of products such as L/Cs despite the deterioration of their credit rating". "It addresses a precise and very acute market gap, for an economy whose banking sector needs support in order to maintain the financing of basic trade products," according to Hoyer, who said more support for Cyprus can be expected.

L/Cs for US municipal bonds in doubt

The use of L/Cs to back US variable-rate municipal bonds is in doubt under a Federal Reserve proposal to exclude such debt from a list of easily sold assets. Since the 2008 financial crisis, banks have flocked to buy municipal bonds, which routinely have the additional security of an L/C, which in turn serves to reduce the price of such debt. In late October, the Federal Reserve proposed that some banks be required to hold enough assets that would be easy to sell during a 30-day credit crunch. The requirements aim to satisfy global regulations to make the financial system less vulnerable to periods of volatility such as occurred during the global financial crisis. While the Federal Reserve's proposal categorizes treasury bonds, some sovereign debt and publicly traded investment-grade corporate securities as easily sold assets, it excludes state and local debt. The proposal also excludes L/Cs that banks extend to variable-rate municipal bonds for additional security. In 2013 municipal bonds suffered their first loss in value for several years as the stock market favored equities over bonds.