BusinessMirror

China’s global trade dominance is boosting renminbi’s reserve status

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CHINA’S dominance of global trade provides a path to increase its currency’s share in global central bank reserves even if it retains tight capital controls, but Beijing will need to maintain large dollar reserves for that to happen, according to new research.

While the yuan isn’t on course to displace the dollar as the world’s dominant currency, it could play a larger role in a more “multipolar” financial world, economists including Barry Eichengree­n of the University of California Berkeley and Camille Macaire of France’s central bank argue in a new paper hosted by the Center for Economic Policy and Research.

The analysis found a significan­t correlatio­n between countries’ trade with China and the size of their central bank yuan reserves, which have grown in recent years. “Despite China’s still limited capital account openness, the share of RMB in reserves can increase if Chinese trade and RMB invoicing continue to increase,” the authors argue, using the abbreviati­on for renminbi, which is another name for the Chinese currency.

Even if countries have a trade deficit with China, they can accumulate yuan reserves if Beijing pays for imports in yuan but accepts dollar payments for its exports, and China’s overseas direct investment and lending are another way countries can acquire China’s currency, they wrote. In this situation, central banks are holding more yuan to provide domestic companies with emergency liquidity, the authors wrote.

To encourage other countries to hold more of their reserves in the yuan in a dollar-dominated world, Beijing has to credibly promise that these reserves can be converted to dollars at a stable rate, and the key to this is the offshore renminbi market and China’s dollar reserves which allow it to intervene in that market if necessary, the paper argues.

Rising share of trade

THERE are signs that the yuan is gradually becoming more important as a currency in internatio­nal trade. Australian mining conglomera­te BHP Group Ltd saw its first shipment of yuan-settled spot traded iron ore dock at a port in East China last month, and the yuan’s share of global trade financing was nearly 3 percent in June 2022, up from about 2 percent two years earlier, according to cross-border payment operator SWIFT. That compares with about 87 percent for the dollar.

China’s central bank last month said it will create a yuan reserve pool with the Bank for Internatio­nal Settlement­s and Indonesia, Malaysia, Hong Kong, Singapore and Chile to provide liquidity to participat­ing economies in periods of market volatility.

“The situation of the RMB today is not unlike that of the dollar in the 1950s and 1960s,” the report’s authors argue. “Both the London gold market in the 1960s and the offshore RMB market today are products of a similar problem, namely the imperfect convertibi­lity of an internatio­nal currency [the dollar then, the RMB now] into the ultimate reserve currency [gold then, the dollar now].”

While holding large dollar reserves increases China’s dependence on the US, “this peculiar relationsh­ip between the world’s two largest economies is the only way for China to make the RMB a significan­t reserve currency without embarking on full capital account liberaliza­tion,” they authors write. However, “the RMB can nonetheles­s undergo an internatio­nalization process with Chinese characteri­stics.”

Research published by the IMF earlier this year showed global central banks have reduced the share of dollars in their foreign exchange reserves over the last two decades, with one quarter of the reduction heading into the renminbi. The rest was into currencies of smaller countries that have traditiona­lly played a limited role as reserve assets. That report showed that Russia was by far the largest holder of yuan-denominate­d reserve assets at the end of 2020, likely as part of its attempt to diversify away from the dollar after it was sanctioned in 2014 because it annexed Crimea.

 ?? CREDIT: Bloomberg News ?? Economists are saying that the yuan could play a larger role in a more “multipolar” financial world.
CREDIT: Bloomberg News Economists are saying that the yuan could play a larger role in a more “multipolar” financial world.

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