Chinese literacy: how the yuan becomes a global currency

By Dmitry Migunov

The transformation of the yuan into a global convertible currency ("internationalization") is in full swing. SWIFT statistics have shown that the use of the Chinese currency in international payments has increased markedly. However, the share of the yuan on a global scale so far remains small . How long will it take for it to enter at least the top three currencies widely used in settlements, and what is the reason for the marked (according to SWIFT statistics) drop in the share of the euro in international trade?
Fifth in terms of volume
In July, the yuan's share of international payments stood at 3.06%, up 0.3 percentage points from the previous month, according to SWIFT data. This is the second time in history - it was higher only in January 2022 - 3.2%. The yuan once again became the world's fifth-largest currency in terms of transaction volume, behind the dollar, euro, British pound and Japanese yen. Compared to two years ago (July 2021), the share of the Chinese currency increased immediately by a whole percentage point. At the same time, if we evaluate the value of the yuan among the currencies that finance international trade, then it is significantly higher - 4.57%, which is 0.3 percentage points more than in June.

At the same time, the share of the euro collapsed. In calculations outside the eurozone, it fell from 36.7% to 13.6%. However, most likely, the adjustment is technical and is associated with the imperfection of the SWIFT methodology. It is impossible to name the exact reason for such abrupt changes, but it can be assumed, for example, that part of the payments within the eurozone could be carried out through the infrastructure of the City of London. Now these movements in the statistics began to be displayed in their actual direction, which determined the real position of the euro in international payments (rather modest). At the same time, it raises the question of the reliability of the SWIFT calculation methodology in principle.

By the way, SWIFT statistics do not take into account all international payments, which is clearly seen in the same PRC. Part of the payments go through the Chinese CIPS system (the total amount of payments in 2022 was just under 100 trillion yuan). The real size of transactions in yuan can thus be tens of percent higher.

Chinese analysts note that the influence of the yuan is increasing in all respects: in payments, investments, trading in the Forex market and in international reserves, with the trend becoming most noticeable in the last 12 months. The weight of the yuan in IMF Special Drawing Rights (SDR) reflects this trend, rising from 10.92% to 12.29%.

The People's Bank of China also notes the increasing use of the yuan in China's international settlements. In the first half of the year, the total amount of cross-border payments in Chinese currency increased by 20% (to 24.5 trillion yuan) compared to the same period last year, thus accounting for 57% of all settlements. And if we take trade in goods, then its share in yuan jumped from 6.7 to 23% during the reporting period. Not least this was due to the expansion of trade in national currencies with Russia.

How the yuan strengthens
China has been making systematic efforts in recent years to internationalize the yuan and turn it into a key part of the international financial system. But it was not always so. In the 2000s, the PRC authorities, on the contrary, tried to prevent the full convertibility of their currency, for which many restrictions were introduced. There were two reasons: firstly, the Chinese leadership was afraid of an outflow of capital, and secondly, the convertibility of the currency complicated the task of maintaining a favorable exchange rate for Chinese exporters - usually lower than the “real” one.

A reassessment of values ​​came in the last decade. In Beijing, it became clear that it was impossible to develop endlessly at the expense of an export-oriented economy - China, in terms of GDP, was already too large to ensure its well-being even at the expense of supplies to the rest of the world. In addition, relations with the United States sharply worsened , resulting in trade wars. And after the dollar became a weapon (as was observed in the situation of sanctions against Russia), China was left with no other options but to develop an ecosystem of payments with its currency . The world's second largest economy, by a wide margin, the largest exporter and one of the largest importers, ultimately has all the fundamental capabilities to do so.

The first pilot project for the cross-border use of the yuan was launched back in 2009. By 2014, the yuan had jumped from eighth to fifth place in terms of international use.

In 2018, China launched its own commodity exchange, where it trades with suppliers from countries such as Iran, Venezuela and Russia. All transactions are in RMB. In 2022, the People's Bank of China has dramatically stepped up efforts to internationalize its currency. Thus, 31 clearing banks were opened in 29 countries of the world. In March, the Chinese company CNOOC and the French Total Energies for the first time paid for the supply of liquefied natural gas in yuan. On June 29, the Bank of Argentina allowed the opening of yuan deposits in the national banking system, and a few months earlier, the Central Bank of Brazil announced that the yuan had surpassed the euro as the second most popular currency for the country's international trade transactions.

On August 16, Lin Caiyi, vice president of the Research Institute of the Forum of China's Chief Economists, called for more active conversion to the yuan in foreign trade and financial relations. According to him, the widespread use of the currency leads to more volatility in the market, but in the long run accelerates the internationalization of the yuan.

At the moment, it can be stated that the path of the yuan to the status of one of the world currencies will still be very long. For now, it is worth talking about competition not with the US dollar, but with the British pound and the Japanese yen. At the same time, the trend towards strengthening the position of the yuan in international trade and settlements is clearly visible and continues to grow. Additional opportunities may arise if China can be the first major economy to adopt a digital yuan.
This article originally appeared in Russian at iz.ru