The internationalization of the Chinese currency has been positive, largely due to its consolidation in trade with China’s partners. However, this growth does not guarantee the heist of the US dollar. Analysts explain to PLATAFORMA that there are areas where the yuan remains far behind, not just the US currency
On his first visit to China, after being elected President of Brazil again this year, Lula da Silva defended that the members of the BRICS (Brazil, Russia, India, China and South Africa) should carry out their commercial and financial transactions with the currencies of the member countries, without using the American dollar (USD).
Shortly afterwards, Beijing and Brasília announced that they would begin to carry out their commercial exchanges without the intermediary of the North American currency, using their own currencies.
It was another important step in the internationalization of the Chinese currency, a process initiated by the Chinese government after the 2008 global financial crisis, when the country realized that its dependence on the USD would be a long-term risk.
To PLATFORMA, Warwick Powell, associate professor at the Queensland University of Technology and president of Smart Trade Networks, describes that since 2008 several foundations have been laid by the Chinese authorities in order to increase the use of the yuan in international transactions.
“These include the People’s Bank of China signing currency exchange agreements with other central banks; the start of studies for the development of the digital yuan in 2014; the development of an alternative interbank platform, CIPS; and the research and development of data environments powered by blockchain technology to support sharing between various agents”.
According to Powell, the United States has had an “outsized privileged” position since World War II, with post-war agreements “framed in the US interest above all others”, including in the international financial system.
“The global system evolved in such a way that the US was able to issue unlimited debt instruments to fund its growing global geopolitical ambitions,” he points out.
For this reason, “most national debt is held in US dollars. China is still a relatively minor player in the global credit space,” he notes. The financial expert stresses, however, that the issue of the internationalization of the yuan should not be framed as a fight against the US currency, but more as a “combination of ‘de-dollarization’, the reduction in the use of the dollar”, and of ‘monetary multipolarity’.
“It is clear that, as a result of the intensification of the instrumentalization of the USD and its accessory payments infrastructure, especially SWIFT, several nations are looking for ways to reduce exposure to risk in an environment in which the liquidity of their financial reserves can be unilaterally censored”, he points out.
“As China is the largest trading partner of over 140 nations, it is conceivable and sensible – given the risks associated with instrumentalizing the USD – that cross-border deals would be possible outside of liquid USD. In addition to risk mitigation, exiting SWIFT can lead to significant savings in transaction fees,” he points out.
According to Powell, these settlements can be carried out using national currencies. In the case of China and its trading partners, concerns about the liquidity of national currencies can be mitigated, especially when these currencies are easily exchanged for goods and commodities.
However, several central banks continue to prefer the US dollar for the settlement of commercial transactions, as most sovereign debt is denominated in US dollars.
“In this context, nations need dollars to pay these debts – either with the International Monetary Fund, directly with the US Treasury in the case of sovereign debt, or with private bond issuers and US-based corporate creditors”, he explains.
The last reason highlighted is the existence of relatively safe and highly liquid investment instruments denominated in USD.
“In other words, where can you invest the USD when it’s not being used for trade deals or paying off debts? In USD-denominated Treasuries or US equities.”
Greater use of national currencies
For Powell, the great opportunity to increase the use of the yuan is in commerce, where there is an irrevocable tendency to settle in national currencies. “It will grow. Network effects will likely accelerate ‘de-dollarization’ for trade deals,” he notes.
“If something like a BRICS currency emerges, then we will witness the next step in the evolution of trade agreements in multinational currencies, establishing trade for a non-national currency.”
During Lula’s visit to China, the new president of the New Development Bank (NBD), created by the BRICS group, DilmaRousseff, said that one of the bloc’s priorities is to expand transactions in the currencies of the member countries.
Adnan Akfirat, a Turkish financial analyst, recently pointed out in an op-ed in the China Daily that the most important development when it comes to challenging the dollar’s hegemony is the spread of trading in other countries’ currencies, including some emerging economies. At the same time, many countries hit by trade sanctions imposed by the US or its allies have been turning to the yuan as an alternative currency.
“Today, 60 countries trade in their national currencies instead of the dollar. To circumvent Western sanctions, India pays for oil imports from Russia in Indian rupees. As the fifth largest economy in the world, India is also trying to internationalize the rupee to reduce its dependence on the US dollar in global trade,” wrote the Turkish analyst.
Russia, hit hard by international sanctions after the invasion of Ukraine, also adopted the yuan as a payment unit.
Russian trade with China is expected to exceed US$200 billion by the end of this year and, according to a Bloomberg report, in February the yuan replaced the dollar as the most traded currency in Russia, in terms of monthly trading volume.
According to the latest data from the Bank of Russia, the yuan’s share of bilateral trade increased from 4 percent in January 2022 to 23 percent at the end of 2022.
Still far
Alicia Garcia-Herrero, chief economist for Asia-Pacific at the French investment bank Natixis, points out to our newspaper that there has indeed been some growth in the yuan in international trade.
“This is especially seen in Chinese imports paid in yuan to countries that really need to accept orders from China, such as large exporters of commodities that basically depend on the country.”
Even so, the economist notes that countries with greater power in the global market still do not exchange in yuan. “Usually only countries with greater financing needs, such as Argentina, Pakistan, Sri Lanka, Russia, etc., account for the largest percentage of the increase in the use of the yuan. Either way, it’s a considerable increase,” she stresses.
Herrero points out, however, that the evolution of the yuan cannot be evaluated only by its use in commercial exchanges. “The problem is that trade is only one-sixth of global transactions. When we look at global SWIFT transactions in yuan, we see that there is not much growth.”
The yuan’s global share across the largest network of international interbank transactions has been increasing, but reached just 2.54 percent in May this year, remaining the fifth most active currency.
The US dollar currently holds the largest share of the SWIFT transaction market at 44.64 percent, followed by the euro at 28.3 percent, the pound sterling at 7.92 percent and the Japanese yen at 2.69 percent.
Herrero points out that some analysts argue that the reduced percentage of use of the yuan through SWIFT is due to the use of the Cross-border Interbank Payment System (CIPS), the Chinese international payment system, a theory that the economist refutes.
“Most transactions within the CIPS are conducted by bilateral transactions between central banks, which amount to 120 billion yuan. This figure may seem high, but it’s beans when compared to global transactions in any currency,” she explains. “In conclusion, yes, it can be said that there has been some progress in trade, but not much overall. For now, it cannot be said that the yuan is really a significant threat to the US dollar.”
