Yuan ascendance: China's push for renminbi internationalisation

The world’s second largest economy with a gross domestic product of $17.7 trillion, second only to the United States with $23.3 trillion, China has been reinforcing the prevalence of its national currency in the international monetary system against US dollar hegemony.

According to recent data from the International Monetary Fund, the yuan - or renminbi (RMB) - now ranks as the world’s fifth-largest reserve currency, with 2.69 percent of foreign exchange reserves held in RMB. It follows after the dollar, euro, Japanese yen and British pound, respectively.

In addition to amplifying its economic influence, internationalising the RMB is also an essential part of Beijing’s drive to expand its power in global politics.

The name is bond, yuan bond

The East Asian nation first began facilitating yuan’s usage in market transactions and international trade settlements in 2009 by taking a step to allow some companies to issue invoices and complete transactions in RMB with companies from ASEAN nations, Hong Kong, and Macau.

Policies along that line, accompanied by an increase in offshore RMB trades, amplified the currency’s prevalence and liquidity outside mainland China. New offshore yuan bond markets were also established in Asia and Europe.

Foreign investors were also urged to trade certain shares with the Shanghai-Hong Kong Stock Connect being launched in 2014. They were given further access to China’s onshore bond market in 2017 with Beijing’s market access scheme Bond Connect. The system also worked the other way around, giving investors from Mainland China access to offshore markets.

To internationalise its currency, Beijing also signed the biggest amount of bilateral currency-swap arrangements in the world, established RMB-denominated futures contracts for gold and crude oil, and made RMB available to members of its Belt and Road Initiative for financing and trade settlements, as well as for loans and issuing bonds from the Asian Infrastructure Investment Bank.

China has also been working to promote the yuan, alongside other local currencies, with its largest trading partner: the Association of Southeast Asian Nations (ASEAN).

One member, Malaysia, this week brought back long-running mentions of establishing an Asian Monetary Fund to wean off Asia’s dependence on the dollar, saying: “There is no need to continue depending on US Dollar in investments.”

Beijing has also extended its efforts to the digital arena, with its attempts for developing a sovereign digital currency, the digital yuan, at the most advanced stage of any other major economy.

Through these policies, the currency’s prevalence in the international monetary system has shown steady growth since the 2000s. Meanwhile, the rivalry between the US and China has escalated. 

But significant support for China, and consequently the yuan, took force last year alongside Russia’s over 400-day-long military campaign in Ukraine.

Close relations with Russia

Following the onset of Russia’s “special operation” in Ukraine, the US began to weaponise the dollar by teaming up with Western allies to impose sweeping international sanctions on Moscow.

That strategy backfired, however, making the Chinese yuan a shining alternative to the dollar, as well as the euro, for Russia. It also created space for the two countries to deepen bilateral ties and hoisted China as a contender to the Western-dominated international monetary system.

This week, Bloomberg reported that RMB had become the “most traded currency in Russia,” leaving the dollar behind for the first time in February and widening the gap in March, although the yuan’s presence in the Russian market was “negligible” before the conflict.

Last year, Moscow’s exchange had begun settling bond transactions in yuan. Earlier in 2023, Russia’s Finance Ministry switched its market operations to the RMB from the dollar and established a structure that allows its sovereign-wealth fund to store 60 percent of its assets in the Chinese currency.

The country is also storing its oil wealth in RMB, and Chinese politicians have been striving to drive forward the currency in crude oil commerce with countries in the Middle East (such as Iraq), going against the petrodollar.

BRICS vs US

Moving to the West, the yuan has also become the second-largest reserve currency in Brazil, taking down the euro and making headway towards the dollar after taking its place among the country’s foreign-exchange reserves in 2019.

The South American country has also been supporting the RMB for investments and commercial payments since February, and reportedly announced in late March that the dollar would no longer be utilised as an intermediary currency, replacing it with the yuan and Brazilian real.

That means two of the world’s five leading emerging economies - Brazil, Russia, India, China, and South Africa, known as BRICS - are increasingly adopting China’s currency in their finances.

Last year, Russian President Vladimir Putin had announced that the five countries were developing a new currency as an alternative to the dollar while speaking at a BRICS summit.

That would usher in further growth for the RMB, alongside the currencies of the other BRICS nations.

While all that doesn’t spell the dollar’s immediate fall from hegemony, they are the footsteps of an increasingly fragmented global financial system, showing cracks in the US-dominated world economy - and even US dominance over the global arena.

On the other hand, China would have to usher in increased yuan convertibility, as well as loosen restrictions on its markets and strict capital controls, to make way for the currency’s rapid internationalisation.

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