China - United States: So that the yuan can soar
If it were possible to take the People's Bank of China's report on the internationalization of the renminbi at face value, it would be on the verge of becoming the world's second most important currency. But this is not the case. In fact, the renminbi accounts for less than 3% of central bank foreign exchange reserves, ranking fifth. The situation would be different if international money managers could be sure of the value of a yuan backed by China's substantial dollar reserves. Paradoxically, the international RMB cannot do without the dollar, and de-dollarization is a long way off.
On October 28, 2023, the publication of the report on the internationalization of the yuan by the People's Bank of China gave rise to a proliferation of articles in the Chinese print and electronic media, celebrating the place taken by the renminbi (RMB) internationally. In a front-page article, the unofficial Global Times praised the BPC* for systematically promoting the internationalization of the yuan. It is committed to developing financial cooperation for payments in national currencies, as well as promoting the non-speculative growth of the offshore yuan market and its presence in the foreign exchange reserves of states1 .
This international focus on the yuan came as a surprise. Yet, since 2016 the BPC* had been publishing an annual report on the internationalization of the yuan that remained under the radar, no echo accompanying this publication. This has now changed radically. Taking its cue from Xi Jinping's thinking in its report on the internationalization of the RMB* , the People's Bank of China welcomes the yuan's progress in international payments and investment, and in its use as a reserve currency2 .
On closer inspection, these are complacent words. While the yuan is increasingly used in trade, its presence on the world's financial markets remains quite modest.
- In 2021, the total amount of cross-border RMB* movements carried out by banks on behalf of customers amounted to RMB 42,100 billion* , ($57.2 billion), an increase of 15.1% year-on-year. Between January and September 2023, the increase was 24%. Nevertheless, SWIFT data shows that, at the end of 2022, after a year-on-year increase of 1.9 percentage points, the RMB* still only contributed 3.91% of international transfers. By September 2023, however, it was catching up with the euro in financing 5.8% of world trade.
- Seen from the inside, the ratio of Chinese cross-border payments (receipts and collections) denominated in RMB* was only 24.4%, after a jump of 7 points, and was still behind the dollar.
- The use of RMB* to finance long-term investments has increased. Offshore lending continued to improve. At the end of 2022, the stock of international debt securities in RMB* stood at $173.3 billion. China, however, ranked just 7e worldwide, despite moving up two places on the previous year3 .
This is a far cry from the figures we'd expect to associate with the world's second-largest economy. What's more, when we consider the most flattering figures, cross-border settlements for the year 2021, the distribution of countries with which China trades in yuan limits their significance.
In 2022, these figures have hardly changed, and it is confirmed that half of all trade - 54% to be precise - is with Hong Kong and Macao, which are not entirely foreign countries to China.
Even more disappointing are the results of the renminbi's presence in the foreign exchange reserves of central banks. According to IMF data, RMB-denomínate reserves* will amount to around $300 billion by the end of 2023, barely 2.69% of global reserves, behind the pound and the yen. The RMB* ranks only fifth among reserve currencies.
The triumphant articles in the media can therefore be forgotten, as the figures bring us back to a reality that is, at best, nuanced. How do we get the renminbi to occupy the position Xi Jinping is aiming for? To rank third in the treasuries of central banks, while awaiting second place. An incontestable measure of the confidence that will be shown in it.
A study by the Banque de France provides some answers. It is based on two observations: China is not ready to accept full convertibility of the renminbi, but this is not a necessary condition for central banks to mix their treasury with yuan4 .
Without the need to access Chinese financial markets, it is through the forty or so swap lines* that the BPC has already signed that governments can be assured of the value and convertibility of the renminbi. Their cumulative value will reach $550 billion by 2022. This figure is set to increase significantly, with new lines being opened every year.
Central banks still need to be sure that the value of the RMB remains predictable and stable. On this second point, the Banque de France's study contains a paradox. For Beijing to be able to guarantee that it is able to contain any speculation on the yuan, the latter must be backed, failing gold, by substantial dollar reserves.
This leads to the disturbing conclusion that, for a long time to come, it is the dollar that will guarantee the yuan's international credibility. With this corollary: de-dollarization is not for tomorrow.
- China's central bank reports progress in yuan internationalization, pledges support for growth of offshore yuan market, Global Times, 28/10/2023.
- The 2023 RMB Internationalization Report, pbc.gov.cn, 27/10/2023.
- Chinese Yuan Edges Out Euro as Second-Most Used Currency in Global Trade Finance, Caixin, 31/10/2023.
- Is capital account convertibility necessary for the renminbi to acquire reserve currency status? Banque de France, 01/11/2023.
