China’s currency gains momentum with expansion of the Brics bloc

Global use of the yuan may grow without exposure to risks associated with unrestricted capital flows

The internationalisation of the yuan, a stated policy objective for China, is a continuing trend. While the world’s largest trading power has made significant progress in this regard, authorities in Beijing have been cautious about full liberalisation of the renminbi, a step many analysts consider necessary for a significant rise in its global reserve currency status. China’s hesitance towards complete liberalisation of its currency arises from fears of destabilising capital flows, a phenomenon observed in other emerging markets. A substantial influx of capital could also lead to an undesirable appreciation of the yuan, negatively affecting China’s exports, which is why Beijing remains open to the idea of a joint Brics currency.

To address these challenges China has adopted a three-pronged approach to promote the yuan. First, it emphasises promoting the currency in trade partnerships. Second, it engages in currency swap agreements with other central banks. Third, it extends loans in yuan to developing countries. The expansion of the Brics bloc to include major oil exporters such as Saudi Arabia and Iran could help support the implementation of this strategy.

Similarly, lending in yuan has become integral to the Belt & Road Initiative, which provides funding for global infrastructure and energy projects. This allows China to internationalise its currency and increase its political influence at the same time. Ultimately, China may expand the global use of its currency without exposing itself to the risks typically associated with unrestricted capital flows.

RUSSIA

Having been excluded from the Western financial system, Russia is leading the international adoption of the yuan. Recent data from Russia’s central bank reveals that the Chinese currency was used in 30%-40% of Russia’s trade settlements. While this can be partly attributed to heightened imports from China, the yuan is increasingly being used to settle imports from third countries that have established swap lines with the People’s Bank of China.

Russia has also become the third-largest clearing centre for offshore yuan transactions, with the Chinese currency emerging as the most traded currency on the Moscow exchange. The first yuan-denominated exchange traded fund (ETF) was introduced on the exchange in 2023, and the yuan now holds a more substantial position in Russia’s sovereign wealth fund than any other currency. Major Russian corporations have also started issuing yuan-denominated corporate bonds.

BRAZIL AND ARGENTINA

In 2014 China and Argentina established a bilateral swap line valued at $11bn. Facing depleted foreign exchange reserves and investor hesitancy due to a history of defaults, securing yuan funding has proven vital for Argentina’s financial stability. Argentina has even used the yuan to settle debts with the IMF, marking the first instance of a South American country using the Chinese currency for this purpose. This could potentially broaden the scope of yuan usage beyond trade settlements.

Despite China’s substantial support for the Argentinian economy, newly elected President Javier Milei has sought to distance his country from Beijing, expressing a reluctance to collaborate with “communist” regimes such as China and Brazil. Consequently, China has reportedly suspended the swap line until Milei demonstrates a commitment to constructive collaboration with Beijing. This loss of affordable funding comes at a challenging time for Argentina, which is still grappling with a severe financial crisis and soaring inflation.

China also has a yuan-clearing arrangement with Brazil, enabling the use of the Chinese currency in trade settlements, with Brazil granted access to China’s Cross-Border Interbank Payment System, an equivalent to the SWIFT messaging system. In April 2023 China and Brazil entered into a currency swap agreement that eliminated the dollar as an intermediary. During an official visit to Beijing that month Brazilian President Luiz Inacio Lula da Silva criticised the dominant role of the dollar in global trade, questioning the rationale behind tying every country to the dollar.

Though the majority of Brazil’s foreign commerce remains in dollars, the share of transactions in other currencies is increasing. By the end of 2022 yuan-denominated foreign exchange assets in Brazil had reached almost 6% of the total, surpassing the euro and becoming the second-largest reserve currency in Brazil’s reserves. This shift is notable, considering that in 2018 Brazil had no yuan holdings whatsoever. In addition, Bolivia recently adopted the yuan for trade settlements, becoming the third South American nation to do so.

SAUDI ARABIA

China recently established a 50-billion yuan swap line with Saudi Arabia. While the amount itself (roughly $7bn) may not seem substantial relative to the trade volume between the two nations, the agreement holds significant symbolic importance, especially considering Saudi Arabia’s pivotal role in the creation and maintenance of the petrodollar system.

China surpassed the US as Saudi Arabia’s largest trading partner more than a decade ago, in 2011. The bilateral turnover has since increased, surpassing the $100bn mark in 2022. Though Russia overtook Saudi Arabia as China’s largest oil supplier in 2023, the currency swap deal offers Saudi Arabia an opportunity to diversify its foreign currency reserves and could lead to oil transactions between the two countries being settled in yuan.

While no official announcement has been made, the recently established swap line sets the stage for such a shift. If Saudi oil were to be priced in yuan, it could challenge the petrodollar, a cornerstone of the dollar’s dominance since the 1970s when Saudi Arabia agreed to price oil exclusively in dollars. This could make debt repayments more costly for the US while allowing China to monetise its debts without having to draw on its foreign exchange reserves.

According to Bloomberg, the Chinese currency surpassed the yen at the end of 2023 to achieve the fourth-largest share in international payments. Other reports based on SWIFT data suggest the yuan even overtook the euro briefly, becoming the second most used currency for global trade a few months earlier. Meanwhile, in China’s crossborder transactions the proportion of yuan settlements recently exceeded that of the US dollar for the first time.

The yuan is growing in prominence as an international currency. While its share of foreign exchange reserves is still dwarfed by the dollar, the Chinese currency is catching up with and overtaking other rivals. This is especially evident in trade settlements and development finance. This forms Beijing’s strategy to internationalise the renminbi without having to loosen capital controls, and the expansion of the Brics bloc is likely to accelerate this trend.