The ostracism of Russia in the wake of Vladimir Putin’s war in Ukraine has given China an important opening to demonstrate how the yuan can be used globally. China’s mBridge project is one example, a global offshore yuan market where the exchange rate can be determined by market forces without the intervention of the PBOC.
What Is Yuan Internationalization?
The Yuan International is a process in which China encourages broader use of its currency abroad to reduce dependence on the dollar. While this is a market driven phenomenon, policy reform and macro-financial stability can play a supportive role. For example, last month, the People’s Bank of China set up a clearing service for yuan to allow Argentina to settle trade with China without having to use the US dollar. The arrangement also makes it easier to transfer funds between the two countries.
In addition, Beijing has been promoting the use of the yuan in its Belt and Road Initiative, encouraging countries along the trade routes to settle in the Chinese currency. The yuan is already the fifth-largest payment and trade financing currency worldwide, with its share growing rapidly. The yuan could soon surpass the British pound and Japanese yen, as well as challenge the USD’s dominance in a multi-polar world order. This would be a huge boost to global de-dollarization, which is underway.
Yuan Internationalization Is A Long Process
Beijing’s pursuit of renminbi internationalization has been ongoing for several years. It aims to lower transaction costs, reduce exchange rate risks and increase the volume of trade and finance settled in the Chinese currency. China has already signed yuan-denominated foreign exchange swap agreements with more than 30 countries and regions, including major oil exporters Russia and Angola. It also launched its own cross-border interbank payment system (CIPS) that is independent of the SWIFT global messaging network and is being used by banks in Russia and Brazil.
These developments reflect the desire by many countries to distance themselves from the dollar, particularly because of growing trade tensions with the United States and deteriorating relations with Washington. These efforts are often referred to as de-dollarization and are one form of a much broader process of increasing competition with the dollar by nontraditional currencies. In the long run, this could challenge the dollar’s dominance as the world’s most important reserve and trading currency.
Yuan Internationalization Will Face Challenges
While the yuan is gaining traction globally, it will have to overcome several hurdles before becoming a low-threshold international currency. In particular, it must achieve critical mass and create network effects that will attract non-Chinese entities to use it as a means of settling transactions. Moreover, despite China’s determination to alter the dollar-Euro hegemony in global payments and reserves, its efforts may be hindered by Beijing’s non-democratic behavior, its geo-strategic leverage and the weakening trust that a China centric supply chain can generate.
Despite the challenges, it is likely that the yuan will become more widely used internationally, particularly with trading partners that are heavily dependent on China’s Belt and Road Initiative (BRI). The yuan’s share in international trade financing will increase as the Chinese government funnels capital to countries such as Pakistan, Sri Lanka and Argentina via swap lines that exchange the yuan for domestic currencies. In addition, the large US interest rate hikes have caused emerging markets and developed economies to diversify their foreign exchange holdings, which provides opportunities for the yuan’s further internationalization.
Yuan Internationalization Is A Latecomer
With solid efforts to promote Yuan International, the renminbi (RMB) is gaining global acceptance. The yuan’s share of global payment transactions, trade financing and reserve currency status has increased significantly in the past three years. The yuan’s use in trade settlements and funding of BRI projects has also been rising in Russia, where it is the fastest-growing currency, and in Latin America, where China is seeking to address Brazil’s dwindling US dollar reserves by promoting bilateral RMB usage under the guise of its Belt and Road Initiative.
Chinese policymakers have accelerated the pace of building an international monetary highway to diversify forex assets now dominated in the US dollar, while empowering the home-grown cross-border interbank clearing system and striving to boost the yuan’s use overseas. Ju has suggested that the PBoC could introduce a progressive tax on cross-border capital flows to guard against financial risk contagions. He emphasized that the policy design should avoid the pitfalls of capital controls and devaluation distortions.
Conclusion
Despite the COVID-19 pandemic and geopolitical conflicts, a drumbeat of international deals suggests yuan is becoming more widely used. But it still faces challenges to break the dollar’s dominance. During his years in jail, Yuan spent time scouring Scripture for justification for his homosexuality, but found none. Instead, he sought God’s grace and lived in obedience to Scripture.
