TOKYO (The Japan Times) - China is putting the yuan front and center in its fight back against the U.S.’s influence over global money.
From trade and Taiwan to TikTok and semiconductor technology, antagonism has flared between the two economic titans. And now, sanctions against Russia have provided China with an important opening to demonstrate just how its currency can be used.
Together, that’s done more to promote the yuan over the past year than Xi’s government achieved in the preceding decade.
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 yuan stretching from Russia and Saudi Arabia to Brazil and even France.
While the U.S. remains the world’s clear financial hegemony, 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 U.S. 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-19 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 U.S. 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 U.S. by basically saying we don’t need you and we don’t need your U.S. dollar.”
That message is resonating in some parts of the world. Unease with the dominance of the U.S. and the greenback is pushing some countries and companies to diversify away from America and Europe.
The use of the yuan 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 have added to that pace. The yuan’s usage in Russian export payments surged thirty-twofold last year alone.
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 U.S., though, flashpoints have multiplied — from feuds over spy balloons to semiconductor technology.
The ostracism of Russia in the wake of Russia’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 such as Brazil.
Neither the People’s Bank of China nor the country’s State Administration of Foreign Exchange immediately responded to faxes seeking comment.
The seeds of Russia’s move toward the yuan were planted back in 2014, when the annexation of Crimea prompted the U.S. and its allies to threaten Moscow’s access to the mainstream financial system.
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 yuan, 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.
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 chief economist who coined the term BRICs more than two decades ago to describe what were then the four big emerging-market powerhouses — Brazil, Russia, India and China — 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 yuan-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.
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 yuan 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 with 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.