How China’s digital yuan can chip away at the US dollar’s dominance
- China’s growing clout makes the Belt and Road Initiative and RCEP trade bloc ideal platforms to push for yuan internationalisation, aided by Hong Kong’s financial centre strengths
At the World Economic Forum in Davos in January, Saudi Arabia’s Finance Minister Mohammed al-Jadaan said the kingdom was open to trading in currencies other than the dollar, for the first time in 48 years.
Beijing is trying to change this situation. So what role can the digital yuan – China’s central bank digital currency (CBDC) – play in de-dollarisation?
Last year, the Standard Chartered Renminbi Globalisation Index, a measure of international yuan usage, rose by 26.6 per cent, topping 2021’s 18 per cent increase. Chinese official data also showed a steady increase in China’s yuan-settled cross-border payments and receipts, with last year’s figure up 15 per cent to 42.1 trillion yuan (US$6.1 trillion). Last March, for the first time, more cross-border transactions with China were settled in yuan than the dollar.
The adoption of the physical yuan for trade settlement and as a global reserve currency has been limited by China’s capital and foreign exchange controls. These also apply to the digital yuan. But just as the physical currency has specific cross-border applications, so does the digital yuan – and it may consequently boost the global wholesale use of the Chinese currency.
This shift will not happen overnight. But, with enough penetration and acceptance of the digital yuan in a jurisdiction or region outside China, a trade and finance system parallel to the dollar system could gain critical mass, allowing countries to bypass the global banking system and US sanctions.
Given their close trade and geopolitical ties with China, belt and road partner countries could more easily accept the digital yuan. For them, the digital yuan may be faster, cheaper and easier to use than the Swift system: interoperability will become a key element.
China railway hub to use Belt and Road connectivity to promote digital yuan
Once more Asian countries deploy their CBDCs, the area encompassed by the RCEP, the world’s largest free-trade agreement, could become a market dominated by central bank digital currencies. Globally, de-dollarisation is a growing trend. Just how far that process goes remains to be seen.
Oriol Caudevilla is an honorary fellow at the Asian Institute of International Financial Law at the University of Hong Kong and a board director at the Global Impact FinTech Forum. The views in this article do not necessarily reflect those of the organisations the author collaborates with