China, the world’s second-largest economy and leading trading partner for 120 nations, has been making strides in fostering the global use of its currency, the renminbi (RMB), also called yuan.
While this movement aims to challenge the US dollar’s dominance, the long-term impact on the global economy remains uncertain.
China has introduced financial infrastructure to support the yuan’s internationalization, developing a cross-border payment system called CIPS as an alternative to Fedwire and the Clearing House Interbank Payments System.
Moreover, digital payment systems such as Alipay and Tencent Pay, and the trialing of the Digital Currency Electronic Payment network since 2020, also contribute to the potential growth in the global use of the RMB.
However, despite these advances, China’s financial structure continues to be primarily dollar-centric, presenting challenges to the RMB’s international standing.
The Chinese government maintains a policy of exchange rate targeting and holds substantial dollar reserves.
The country’s capital markets, still in development and with limited foreign participation, have yet to fully support a freely exchangeable RMB, a prerequisite for reserve currency status.
The majority of global foreign currency debt is denominated in US dollars and very little in RMB, challenging the narrative of the RMB replacing the dollar on the international stage.
According to SWIFT data, RMB-denominated transactions represented less than 1.5% in December 2022, slightly more than those denominated in Australian dollars and less than those denominated in Swiss francs.
This puts the RMB in only seventh place worldwide. The US dollar, however accounted for nearly 48% of the total.
However, these statistics may not reflect the complete picture of RMB usage, as not all cross-border transactions utilize SWIFT.
ANZ’s China research team estimates that about 20% of transactions settled using China’s CIPS system bypass SWIFT. If most international RMB usage is trade-related, roughly 5-7% of global trade may already be denominated in RMB.
While some view this level of RMB usage as underwhelming, it’s beneficial from China’s standpoint if the goal is to safeguard against potential Western sanctions and optimize bilateral trade efficiency.
Even with the US dollar’s dominance, evidence suggests sanctions have lost some of their effectiveness, demonstrated by the resurgence of Russian oil exports to pre-2019 levels.
Second, the total size of the cross-border payments market — around US$170 trillion per year — is about eight times larger than world merchandise exports at US$22 trillion.
Ultimately, an RMB-based financial ecosystem might reduce the cost of sanction circumvention and promote trade, aligning with China’s strategic objectives.