In December 2022, the report to the 20th National Congress of the Communist Party of China called for the internationalisation of Renminbi (RMB)/Yuan in an orderly manner. The 2023 Government Work Report also stressed that China will keep the RMB exchange rate stable at an adaptive and balanced level. China has been trying to reduce its dependency on the US dollar and increase global usage of the RMB. In 2022, China made substantial progress in the process. A few countries, such as Argentina, Brazil, Bangladesh, Russia, and Saudi Arabia, have already started using the RMB.
The paper aims to analyse the increasing usage of the RMB and its feasibility.
Chinese Efforts to Internationalise the RMB
China has been trying to push for the internationalisation of the RMB for long but the process has been expedited since Russia-Ukraine war of February 2022. With respect to China, there was a threat of financial decoupling from the US and Russia faced financial sanctions. Global payment systems such as Visa and Mastercard have suspended operations in Russia. Russian banks have also been expelled from the Society for Worldwide Interbank Financial Telecommunication system (SWIFT).[i] According to a Financial Times report, before Russia’s war in Ukraine, the RMB had a small trading volume in the Russian market. The RMB’s share has doubled since the crisis began.[ii] On 10 April 2023, the Bank of Russia announced that the yuan/rouble pair recorded a 39 per cent share of trading in the Russian currency market.[iii]
Xu Jin, Chief Economist of China Energy Construction Group Investment Co., Ltd., has said, “China must take precautions and participate more actively in the international financial system. We must work faster to drive the internationalization of the RMB, act with initiative to promote the construction of the energy and derivatives market system, and continuously improve the rules and regulations of Shanghai crude oil futures to accelerate the establishment of a “petro-RMB” system denominated in RMB”.[iv]
China is also encouraging other countries to accept the RMB for international transactions. Starting from May 2023, Argentina has decided to shift from the US dollar to the RMB for all payments for imports from China. In February 2023, the People’s Bank of China signed an agreement with Brazil’s central bank for settlements in RMB.[v] In March 2023, the Chinese national oil company and France’s Total Energies settled their LNG trade payment in RMB through the Shanghai Petroleum and Natural Gas Exchange.[vi]
During Xi Jinping’s visit to Saudi Arabia in December 2022, he highlighted that China intends to “make full use” of the Shanghai Petroleum and Natural Gas Exchange as a platform to carry out oil and gas trade settlement in RMB. Saudi Arabia is considering settling oil exports to China in RMB. In 2022, China imported USD 44 billion of crude oil from Saudi Arabia and exported USD 27 billion of manufactured goods. Saudi Arabia is considering receiving RMB for crude oil exports and using the RMB received to pay for its imports from China.[vii] Some progress has already taken place, the Export-Import Bank of China (China Exim Bank) has achieved the first loan cooperation with Saudi National Bank in RMB, facilitating financial cooperation under the framework of the Belt and Road Initiative.[viii] The proposal of selling oil in RMB could be a significant move towards the de-dollarisation of the world economy.
It may be noted that since the US and Europe have banned Russia from the international financial system, Bangladesh decided to pay the Russian loan of USD 318 million for the construction of its Rooppur Nuclear Power Plant in RMB to Russia.[ix]
Notably, the People’s Bank of China has shifted its RMB internationalisation strategy since 2022. Rather than focussing on RMB pricing for crude oil and expanding foreign investor access to onshore securities, the Central Bank has begun pushing for greater use of the currency in the settlement of cross-border commodities trades and improving global access to derivatives tied to RMB assets.[x] On 15 May 2023, China launched the trading of the Swap Connect scheme. It is an interest rate swap market access scheme.[xi] Many companies and financial institutions are likely to issue yuan-denominated bonds in Hong Kong and other offshore markets.[xii] These initiatives might further help in attracting traction to the RMB.
Conclusion
The RMB is the fifth most active currency for global payments by value. The role of the RMB is growing; it has expanded from trade settlements to cross-border investment and loans. Use of RMB by countries as a reserve currency is gaining greater acceptance in the aftermath of the sanctions and the weaponization of the dollar by the West against Russia. Given the projections of the Chinese economy, the internationalisation of the RMB will increase but its process will be gradual. Currently, only a few countries are considering using the Chinese currency over the US dollar; it will take some time for the RMB to match up to the US dollar. In the given geopolitical scenario, the process will be challenging for China, as the RMB is still a relatively smaller global currency player.
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*Dr Teshu Singh is a Research Fellow at the Indian Council of World Affairs, New Delhi
Views expressed are personal.
Endnotes
[i] Mia Nulimaimaiti, China’s yuan becomes most traded foreign currency on Russian exchange amid efforts to ‘de-dollarise’ economy, South China Morning Post, https://www.scmp.com/economy/china-economy/article/3195054/chinas-yuan-becomes-most-traded-foreign-currency-russian (Accessed on May 9, 2023).
[ii] Hudson Lockett and Cheng Leng, Renminbi’s share of trade finance doubles since start of Ukraine war, The Financial Times, https://www.ft.com/content/6d5bbdbc-9f5d-41b2-ba80-7d8ac3973cf3 (Accessed on May 9, 2023).
[iii] SHI JING, Yuan's global march gathers momentum, China Daily, May 8, 2023, http://www.chinadaily.com.cn/a/202305/08/WS64584cc7a310b6054fad190c.html (Accessed on May 15, 2023).
[iv] Xu Jin, Ten Revelations from the Russia-Ukraine Conflict Concerning China’s Energy Security, CSIS, https://interpret.csis.org/translations/ten-revelations-from-the-russia-ukraine-conflict-concerning-chinas-energy-security/ (Accessed on May 12, 2023).
[v] SHI JING, Yuan's global march gathers momentum, China Daily, May 8, 2023, http://www.chinadaily.com.cn/a/202305/08/WS64584cc7a310b6054fad190c.html (Accessed on May 15, 2023).
[vi] Andrew Hayley, China completes first yuan-settled LNG trade, Reuters, https://www.nasdaq.com/articles/china-completes-first-yuan-settled-lng-trade , (Accessed on May 10, 2023).
[vii] P.S. Srinivas, Why China’s yuan-for-oil push in the Middle East is no threat to the US dollar, South China Morning Post, https://www.scmp.com/comment/opinion/article/3203902/why-chinas-yuan-oil-push-middle-east-no-threat-us-dollar (Accessed on May 13, 2023).
[viii] China Exim Bank, Saudi National Bank achieve first loan cooperation in yuan, Global Times, https://www.globaltimes.cn/page/202303/1287343.shtml (Accessed on May 12, 2023).
[ix] Anant Gupta and Azad Majumder, Bangladesh to pay off Russian nuclear plant loan in Chinese currency, the Washington Post, https://www.washingtonpost.com/world/2023/04/17/bangladesh-russia-yuan-china-loan/
(Accessed on May 10, 2023).
[x] Hudson Lockett and Cheng Leng, Renminbi’s share of trade finance doubles since start of Ukraine war, Financial Times, https://www.ft.com/content/6d5bbdbc-9f5d-41b2-ba80-7d8ac3973cf3 (Accessed on May 12, 2023).
[xi] Huaxia, Swap Connect between Hong Kong, mainland officially launched, Xinhua, https://english.news.cn/20230515/c9e125a5a78a436889bee50aa893f932/c.html (Accessed on May 12, 2023).
[xii] Wang Xiaoqing and Zhang Ziyu, What’s in store for yuan internationalization in 2023?, Nikkie Asia, https://asia.nikkei.com/Spotlight/Caixin/What-s-in-store-for-yuan-internationalization-in-2023 (Accessed on May 16, 2023).