China exposure to US dollar ‘weaponisation’ demands rethink on yuan internationalisation as geopolitical woes intensify, Yu Yongding warns
- Securing China’s overseas assets has become more difficult in a time rife with geopolitical wrangling that has altered the world’s currency-use landscape
- While the yuan is positioned to play a ‘bigger role on the international stage’, international monetary system looks to remain dominated by US dollar
Even as Washington’s “weaponisation” of the US dollar is pushing more developing countries to embrace the yuan, it poses such an outsized threat to China’s overseas assets that Beijing must dynamically refine its yuan-internationalisation scheme, according to a prominent economist.
“The security of Chinese holdings has increasingly become a geopolitical issue,” Yu Yongding, a former policy adviser for the People’s Bank of China, wrote in an article on Wednesday.
“The weaponisation of the US dollar has completely destroyed the national credit on which the international monetary system is based,” alleged Yu, who is now serving as academic adviser for the Beijing-backed think tank China Finance 40 Forum.
China slashed US$105 billion, or 11 per cent, of its US Treasury bill holdings in the past year to May, amid amplified concerns over the US freezing US$300 billion worth of Russian central bank assets via sanctions imposed because of the Russian invasion of Ukraine in February 2022.
“Yuan internationalisation is one of the tools, rather than the ultimate goal, to optimise cross-border resource allocation and ensure the security of China’s overseas assets,” said the outspoken economist.
Why is China’s yuan-internationalisation push failing to meet expectations?
The rise of the yuan’s international status depends partially on the decline of the dollar’s status, while the Russian-Ukrainian conflict has accelerated the process of asset diversification.
The assessment of Beijing’s yuan ambitions, which kicked off in 2009 with trade settlements, came as the Chinese currency, as well as its digital currency and cross-border payment system, have gained popularity among many developing countries.
While Brazilian President Luiz Inacio Lula da Silva openly called for local currency settlements, rather than through the US dollar, during his China visit in April, Argentina’s government also paid its IMF debt in yuan gained through the bilateral currency swap plan.
China’s government doesn’t set a quantitative target for yuan’s overseas use, but leadership wants an orderly development. Academics and think tanks often cite a goal of bringing the Chinese currency on par with the US dollar and euro by 2035.
Geopolitical changes have brought opportunities for the yuan to play a bigger role on the international stage
According to a report released by Beijing’s Renmin University a week ago, the yuan’s internationalisation index – evaluated in terms of its use in international trading, foreign exchange reserves and transactions – reported a score of 6.4 out of 100 last year.
This was the yuan’s highest rating to date, but it was well behind the US dollar and euro, which stood at 50.5 and 25.16, respectively.
The yuan also ranked fifth in Swift’s global payment list, with a 2.77 per cent share in June, well behind the US dollar at 42 per cent or the euro at 21.25 per cent.
The sanctions, according to Yu, were the equivalent of the collapse of the Bretton Woods system to international finance, a landmark event when in 1971 US President Richard Nixon announced the “temporary” suspension of the dollar’s convertibility into gold.
“Geopolitical changes have brought opportunities for the yuan to play a bigger role on the international stage,” he said.
Yuan ‘new choice’ in Asia-Pacific as world’s biggest trade deal opens doors
Russia, having been denied access to the US dollar, subsequently began using the yuan in trade, forex trading and reserves.
According to Chinese customs, trade between Russia and China reached a record high of US$190.3 billion in 2022, up 29.3 per cent from the previous year. And in the first quarter of this year, it reached US$53.8 billion, up 38.7 per cent, year on year.
In March, the value of yuan purchases by individual Russian residents rose to 41.9 billion roubles (US$450 million) from 11.6 billion roubles in February, Central Bank of Russia data showed.
It accelerated foreign-exchange-diversification efforts by a number of countries, particularly developing countries’ central banks, by signing currency-swap agreements with China’s central bank.
As of July, more than 70 foreign central bank-type institutions have entered China’s interbank bond market, and monetary authorities in more than 75 countries and regions have included the Chinese yuan in their foreign exchange reserves.
According to Yu, the currency-swap agreement is more a reflection of the trend towards the “de-dollarisation” of the international currency market, particularly the efforts of developing countries to free themselves from their dependence on the dollar for liquidity, to prevent the abuse of financial sanctions by the US.
“The de-dollarisation is not a cyclical fluctuation, but a long-term trend,” he added.
In the second quarter, the yuan accounted for 49 per cent of China’s cross-border transactions, and the quarterly data overtook the US dollar for the first time, according to a Nikkei analysis last week.
China needs to accelerate the development of domestic demand and strike a trade balance through structural reforms, Yu added.
