Securing China’s overseas assets in this turbulent era, punctuated by widespread geopolitical strife, has proven to be an intricate task. The global landscape for currency use has changed significantly, affecting the status and trajectory of the Chinese Yuan (CNY), the official currency of China. Even though the Yuan is on track to become more influential internationally, the international monetary system remains predominantly influenced by the United States Dollar (USD).
In this respect, the increasingly apparent weaponisation of the USD by Washington is pressuring numerous developing nations into accepting the Yuan. However, this approach also poses a significant risk to China’s overseas assets. Given this considerable threat, it is critical that Beijing dynamically revises its scheme for internationalising the Yuan, according to an eminent economist.
Yu Yongding, a previous policy adviser for the People’s Bank of China (PBOC), stated on Wednesday that, “The security of Chinese holdings has increasingly become a geopolitical issue”. Yu, currently an academic adviser for the Beijing-backed think tank China Finance 40 Forum, argues that the weaponisation of the USD has entirely disrupted the national credit, a key basis of the international monetary system.
In response to growing apprehension about potential US sanctions – such as those that resulted in the freezing of $300 billion worth of Russian central bank assets due to the February 2022 invasion of Ukraine – China reduced its holdings of US Treasury bills by $105 billion (11%) in the year to May.
Yu expressed that, “Yuan internationalisation is one of the tools, rather than the ultimate goal, to optimise cross-border resource allocation and ensure the security of China’s overseas assets”. The escalating status of the Yuan on the international stage is partly tied to the waning influence of the USD, and the Russian-Ukrainian conflict has expedited the asset diversification process.
Beijing’s efforts to promote the Yuan internationally commenced in 2009 with trade settlements. The currency, alongside its digital variant and the cross-border payment system, has seen increased acceptance in numerous developing countries. For instance, during a visit to China in April, Brazilian President Luiz Inacio Lula da Silva openly advocated for settlements in local currency rather than in USD. Similarly, Argentina utilised Yuan obtained from a bilateral currency swap plan to pay off its IMF debt.
China’s government has not set a numerical target for the Yuan’s global usage but prioritises systematic growth. Think tanks and academics often allude to the objective of equalising the Chinese currency with the USD and the Euro by 2035.
A report published by Beijing’s Renmin University highlighted that the internationalisation index of the Yuan – calculated based on its involvement in international trading, foreign exchange reserves, and transactions – attained a rating of 6.4 out of 100 in the previous year. Although this is the highest rating the Yuan has received to date, it lags substantially behind the USD and the Euro, which scored 50.5 and 25.16, respectively.
The Yuan also ranked fifth in Swift’s global payment list, with a 2.77 per cent share in June, well behind the USD at 42 per cent and the Euro at 21.25 per cent.
Yu suggested that the sanctions were tantamount to the disintegration of the Bretton Woods system for international finance. This was a watershed moment in 1971 when US President Richard Nixon announced the “temporary” suspension of the USD’s convertibility into gold. “Geopolitical changes have brought opportunities for the Yuan to play a bigger role on the international stage,” he stated.
With Russia barred from accessing the USD, it started to use the Yuan for trade, forex trading, and reserves. Trade between Russia and China surged to a record $190.3 billion in 2022, marking an increase of 29.3% from the previous year. In the first quarter of this year, it reached $53.8 billion, reflecting a year-on-year increase of 38.7%.
In March, the value of Yuan purchases by individual Russian residents rose to 41.9 billion roubles ($450 million) from 11.6 billion roubles in February, according to data from the Central Bank of Russia.
This prompted a surge in foreign exchange diversification efforts by several countries, particularly developing countries’ central banks, resulting in numerous currency-swap agreements with China’s central bank. As of July, over 70 foreign central bank-type institutions had entered China’s interbank bond market, and monetary authorities in over 75 countries and regions had incorporated the Chinese Yuan into their foreign exchange reserves.
Yu contends that these currency-swap agreements reflect a broader trend towards the “de-dollarisation” of the international currency market, particularly the efforts of developing countries to reduce their reliance on the USD for liquidity and to protect against the misuse of financial sanctions by the US. “The de-dollarisation is not a cyclical fluctuation, but a long-term trend,” he added.
In the second quarter, the Yuan accounted for 49% of China’s cross-border transactions, surpassing the USD for the first time according to a Nikkei analysis last week. However, an increased global use of the Yuan is likely to bring about heightened risks, as witnessed during the 1997 Thai baht crisis and with the Hong Kong dollar a year later.
China needs to accelerate the development of domestic demand and establish a trade balance via structural reforms, Yu added. To secure China’s overseas assets in this increasingly volatile era, it is clear that a careful and dynamic strategy for the internationalisation of the Yuan is required.
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