Global role of yuan ‘limited’
Despite talk of a new world order, analysts say lack of reforms means currency will pose little challenge to US dollar
Russia’s invasion of Ukraine will have only a limited impact on Beijing’s push to internationalise the yuan, and its long-term success as a more widely utilised global currency will need to run parallel with China’s deeper financial reforms, according to analysts.
Their assessment came after US Federal Reserve chairman Jerome Powell said at a US Senate Banking Committee hearing last week that the Ukraine war may “change the trajectory” of China’s moves to insulate itself from a global financial system that is heavily tied to the dollar.
But in a note to its clients, research firm Rhodium Group ruled out the Cross-Border Interbank Payment System being a replacement for the Swift financial messaging system, with only 75 direct participants. It said the basic constraints of China’s trade surplus and capital controls meant that the odds of the yuan’s international use expanding were remote.
“China is in a dilemma. On the one hand, it badly wants to internationalise its currency. But on the other hand, it is quite reluctant to open its capital account and liberalise its financial sector,” said Edwin Lai, an economics professor at Hong Kong University of Science and Technology.
Data from the International Monetary Fund (IMF) showed that the yuan was the world’s fifth-largest reserve currency, with central banks holding the equivalent of about
US$319 billion worth of yuan reserves in the third quarter of 2021.
“The internationalisation of the renminbi still pales in comparison with the use of the dollar. Central bank holdings of the yuan are only about 2.5 per cent of their total reserves. By comparison, the dollar is over 50 per cent of reserves,” said Jeremy Mark, non-resident senior fellow at the Atlantic Council and a former IMF official.
He added that while the yuan was used for global trade invoicing, its use was still limited. Also, the yuan was not broadly employed for global investment purposes with a focus on Chinese securities.
“The key reason for this is that China continues to impose restrictions on the free movement of capital in and out of the country, and the renminbi itself is not freely tradeable,” Mark said. “Until China liberalises its capital account and frees up controls on its currency, the renminbi’s international role will be limited.”
Information from the Observatory of Economic Complexity shows China is Russia’s biggest trading partner.
Official figures show bilateral trade rose by 38.5 per cent during January and February, year on year, the highest growth rate for the first two months of any year since 2010.
It was also reported that there have been inquiries from Russian firms about opening new bank accounts at Chinese state banks in Moscow, as a way to help mitigate the negative impacts on business transactions due to international sanctions.
“Even if Russia uses the renminbi more in its transactions, it will not help the international use of the renminbi too much,” Lai said. “Russia is not a very large economy at about 2 per cent of the global [gross domestic product].”
David Zweig, director at Transnational China Consulting, said the so-called new world order of China-Russia axis could reflect poorly on authoritarian rule after the invasion of Ukraine, and President Xi Jinping’s establishment of a friendship with President Vladimir Putin and Russia that has “no limits” could not last long.
Benjamin Cohen, distinguished professor emeritus at the University of California, Santa Barbara, said: “An authoritarian government [is a reason that] market actors are reluctant to make use of a currency whose issuing government cannot give assurances that property rights will be respected and contracts will be fully enforced.”
Chinese researchers have suggested the digital yuan payment system could also serve to counter Western sanctions on Russia, as the e-yuan may help reduce reliance on bank accounts and bypass financial intermediaries.
Lai has estimated that the yuan could become a distant third payment currency globally by 2030, with a share of about 6 to 7 per cent compared with less than 2 per cent today, following the US dollar and Euro but surpassing the British pound sterling.
“To challenge the [US dollar], the [yuan] will need to gain trust from the global community,” said Marcus Vinicius de Freitas, visiting professor of international law and international relations at China Foreign Affairs University in Beijing and a senior fellow at the Morocco-based think tank Policy Centre for the New South.
“China should improve its global settlement and clearing instruments to facilitate international transactions,” he also said, adding that trust was the most critical factor, and it took time to build.
China continues to impose restrictions on the free movement of capital in and out of the country
JEREMY MARK, THE ATLANTIC COUNCIL