China’s international use of the renminbi is growing at record highs

Unlock Editor’s Digest for free

FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.

China’s use of the renminbi in cross-border transactions has reached record levels this year as closer ties with Russia support Beijing’s efforts to internationalize its currency and reduce reliance on the US dollar.

In July, 53 percent of China’s inbound and outbound transactions used the Chinese currency, according to data from the State Administration of Foreign Exchange, up from about 40 percent for the same month in 2021.

The secure data shows cross-border transfers made by banks on behalf of non-bank customers and mainly represents trade settlement, although it also captures investment flows and debt payments.

Cross-border use of China’s currency got a boost after US sanctions limited Russia’s ability to trade in dollars following its invasion of Ukraine. In February this year, the governor of Russia’s central bank, Elvira Nabiullina, said that the use of the Chinese currency for settlements, financial transactions and deposits had “increased”.

“The sanctions situation has created a huge incentive for China to develop its (financial) system and to develop solutions to link China’s system with Russia’s,” said Alexandra Prokopenko, a researcher at the Carnegie Institution in Berlin.

The rise in renminbi-denominated trade has also been helped by foreign exchange lines Beijing has opened or renewed through 2023 with Saudi Arabia, Argentina and Mongolia — all commodity producers of goods China wants.

As of 2022, new renminbi clearing banks have also been established in Laos, Kazakhstan, Pakistan, Brazil and Serbia, according to the People’s Bank of China.

According to some analysts, one of the reasons why China has kept its exchange rate stable against the US dollar this year, despite selling pressure on the yuan, is to encourage trading partners to trade more in renminbi. Chinese President Xi Jinping has repeatedly called for a strong currency.

“You can’t go to Indonesia, Thailand, South Korea and say, ‘Hey, let’s trade in renminbi rather than dollars,’ if you have a weak currency. For that to happen, you have to have a stable currency,” said Louis-Vincent Gave of Gavekal, a financial services firm.

Beijing’s previous efforts to internationalize the renminbi faltered after the PBoC staged a devaluation of the currency in 2015 to combat slowing economic growth. It boosted the competitiveness of Chinese exports but led to a substantial decline in the use of the renminbi for settlement, which took years to reverse.

Edwin Lai, a professor at the Hong Kong University of Science and Technology who specializes in the internationalization of the renminbi, said it was “normal” for large economies such as China to settle most of their trade in their own currency.

“By international standards, it is not a great achievement,” Lai said. At the same time, he noted, “they’ve obviously improved.”

He said Beijing does not want to compete with the US dollar, but said Chinese officials “don’t want to be at the mercy” of the currency.

Globally, the renminbi is still a distant second to the dollar for trade finance. It also accounts for just 4.74% of global payments, behind the dollar, euro and pound sterling, according to the latest data from international payments network Swift.

However, alternative payment systems such as China’s CIPS and other private networks make relying on Swift to provide a complete picture of global currency transactions less reliable, according to Lucy Ingham, editor-in-chief of FXC Intelligence. a consultancy that tracks digital payments.

Further increases in the renminbi’s share in global trade finance may be limited by the West’s reluctance to transact using the renminbi.

“I think it’s very unlikely that we’ll see China’s trade with the United States, with the European Union, move to the Chinese currency,” said Daniel McDowell, a professor at Syracuse University and a senior member of the Atlantic Council.

Long-standing obstacles to the widespread use of the renminbi – in particular, China’s capital controls and the strong network effects that support the use of the US dollar – limit its progress beyond trade regulation.

Most forex traders still prefer to trade in dollars, said Wee Khoon Chong, a senior market strategist at BNY Mellon in Hong Kong.

“From our customer base, we have seen increasing activity in (renminbi) as payment,” Chong said. But he said its use had not reached “a critical tipping point” where it would replace a major currency. “It’s a slow process.”

China “is not looking to overthrow the global dominance of the dollar,” McDowell said. “That comes with a lot of responsibility and accepting certain vulnerabilities. . . China’s motives here are primarily about autonomy and resilience.”

Additional reporting by Nian Liu and Wenjie Ding in Beijing