Beijing May 4 2023: China is putting the yuan front and center in its fight back against the US’s unique influence over global money.
President Xi Jinping’s government has been busy striking deals over the past year to expand the ways in which the currency is used, with new agreements linked to the renminbi stretching from Russia and Saudi Arabia to Brazil and even France.
While the US remains the world’s clear financial hegemon, these moves are helping China to carve out a bigger place for itself in the international financial system. They come at a time when geopolitical strains are growing and global commerce is becoming an ever-more-active battleground.
Antagonism has flared between the two economic titans over issues ranging from trade and Taiwan to TikTok and technological know-how. Hard-hitting sanctions on Russia have revealed a new willingness by the US to weaponize the dollar. Together, that’s done more to promote China’s yuan over the past year than Xi’s government achieved in the preceding decade.
The ramp-up is also a response to China’s shifting position within the global economy as it emerges from the era of Covid-lockdowns with growth running more slowly than it once did and the global push for freer trade in retreat. That’s spurred leaders in Beijing to up the ante in building the country — and in particular its currency — into an alternative pole for international finance, trade and lending.
The nation is working to demonstrate “that there’s a world outside of the US and the Western world,” said Adrian Zuercher, head of global asset allocation and co-head of global investment management for the Asia-Pacific region at UBS Global Wealth Management’s office in Hong Kong. “You’re sending a very strong signal to the US by basically saying we don’t need you and we don’t need your US dollar.”
That message is resonating in some parts of the world. Unease with the dominance of the US and the greenback is pushing some countries and companies to diversify away from America and Europe.
The use of the renminbi in contracts for everything from oil to nickel is gathering speed, with the currency’s share of global trade finance tripling since the end of 2019. That’s still a tiny portion of global transactions, and the currency remains tightly controlled by Chinese authorities. But sanctions that ensnared Moscow following its invasion of Ukraine have added to that pace. The yuan’s usage in Russian export payments surged 32-fold last year alone.
Going Global
Xi, who is embarking on his second decade in charge of the People’s Republic, has taken steps to promote the country’s reputation abroad, even as he focuses on implementing reforms and bolstering growth at home. His first foreign excursions after lifting lockdowns were to key energy suppliers Saudi Arabia and Russia.Trips to Beijing by Brazilian President Luiz Inacio Lula da Silva and France’s Emmanuel Macron were accompanied by a host of new commercial agreements. And China was central to brokering an Iran-Saudi detente.With the US, though, flashpoints have multiplied — from feuds over spy balloons to semiconductor technology.
The ostracism of Russia in the wake of Vladimir Putin’s war in Ukraine has provided China with an important opening to demonstrate just how the yuan can be used. It also stoked concern among some nations about being beholden to the dollar and the euro, the two biggest currencies.
Locked out of the central international payments system known as SWIFT, Russia embraced the yuan for trade, private savings and foreign-exchange transactions. China has developed its own international-payments platform — CIPS — that’s entirely separate from SWIFT, which has been embraced not only by institutions in Russia, but also by banks that operate in places like Brazil.
“China’s willingness to maintain growth while paving new paths lends itself for other nations to have greater confidence to use the yuan,’’ said Victor Gao, a professor at Soochow University and vice president of think tank Center for China and Globalization. “If the US wants to rock the boat, then China will need to make necessary amendments to meet the challenges.’’
Neither the People’s Bank of China nor the country’s State Administration of Foreign Exchange immediately responded to faxes seeking comment.
Russian Experiment
The seeds of Russia’s move toward the yuan were planted back in 2014, when the annexation of Crimea prompted the US and its allies to threaten Moscow’s access to the mainstream financial system. But it was the full-blown invasion of Ukraine last year that fast-tracked China’s acceptance.
Yuan savings accounted for 11% of Russia’s total deposits as of January, compared with practically none before the war, and the yuan has replaced the dollar and euro as the most traded currency from St. Petersburg to Vladivostok.Russia and others have also begun to use the yuan in transactions that don’t even involve China. Bangladesh, for example, agreed with Russia last month to settle a $300 million payment related to the building of a nuclear plant near Dhaka in renminbi, according to officials familiar with the matter.
As oil income helps Russia’s public finances to stabilize, the nation may even be looking to buy yuan in an effort to rebuild foreign reserves.
But there are limits to the experiment. The Kremlin has been left with very few choices, and China’s financial offerings still struggle to compete. Without deep capital markets or open capital accounts, it can be difficult to move money in and out of the country — a complaint longtime investor Mark Mobius voiced earlier this year.
Yuan’s Hurdles
The lack of deep, free markets is a hindrance if China really wanted to take on the dollar or euro as the global currency of choice.
A fully international yuan “can’t happen unless China allows greater freedom of the currency and inward as well as outward investment,” said Jim O’Neill, the former Goldman Sachs Group Inc. chief economist who coined the term BRICs more than two decades ago to describe what were then the four big emerging-market powerhouses with potential to challenge the existing economic order.
Even with the drumbeat of international deals, the currency is not fully convertible. There are restrictions on its use in areas such as cross-border loans and portfolio investments.
Limitations on the variety of renminbi-based investment products — and the simple inertia that stems from sticking with the prevailing reserve currency — are also major impediments to the yuan becoming broadly accepted as an alternative to the dollar.
“There’s still a long way to go for China to build up its global clout,” said Chen Xingdong, head of global markets research in China at BNP Paribas SA.
In the first few decades of this century, China has taken steps to open up stock and bond markets to encourage inbound investment and loosened some of the strictures around its managed currency. But Xi’s government has resisted broader measures that would encourage international yuan usage — such as allowing capital to flow freely — to avoid the possibility of sudden outflows that stand to potentially destabilize the economy and threaten the Communist Party’s grip on power.
“There’s so much money queuing up from China to go outside, and there’s probably a limit on how much outside money is queuing to go back in,” said UBS’s Zuercher. “Controlling capital flows is still extremely important.”
The renminbi is only the fifth-most popular currency for cross-border payments. Excluding payments between countries that share the euro, China’s currency accounted for 1.7% of cross-border payments at the end of March, compared to around 50% for the dollar and 22% for Europe’s common currency, according to data from SWIFT. That, of course, doesn’t include transactions made via China’s CIPS alternative, but that system as a whole is still dwarfed by the mainstream SWIFT platform.
Diversification Demand
Still, for those in China itself, the usage of the yuan in international transactions has just recently surpassed the dollar, according to research from Bloomberg Intelligence and based on State Administration of Foreign Exchange data.
The local currency’s share of cross-border payments and receipts hit a record high of 48% at the end of March, compared with almost zero back in 2010, while the dollar’s share dropped to 47%.
Even with the the dollar’s dominance relatively entrenched for years to come, some observers speculate that the greenback is headed for a longer-term decline. The events giving life to yuan usage right now may ultimately be a key contributor.
Repercussions from Russia’s war have made other nations anxious about the risk of US-led sanctions, said Esther Law, a senior money manager at Amundi SA. She expects the yuan to continue rising in popularity amid the fear of US-led sanctions and as a “practical” part of China’s growing role as a lender.
The perk of diversification also applies to China. There’s safety in having standing arrangements with a plethora of trading partners in case simmering tensions with the US turn to a boil.
“Geopolitical tensions just make it that much more important for China to promote the international use of its own currency,” said Stephen Jen, co-founder of Eurizon SLJ Capital. “There is a war of attrition now between the US and China, in investment and finance.”
