In Yuan taking the long view, I focused on increasingly attractive features available in South-East Asia to encourage trading confidentily in the Chinese currency
What is more, China has a vested interest in encouraging Yuan-based transactions with Asian partners, opening new venues for China’s exports to compensate for losses on American markets
Ultimately, China will seek to balance the yuan's internationalization with long-standing control over international capital flows and exchange rates - no easy task
A flywheel for yuan
The factors which established the U.S. dollar’s preeminence globally over three quarters of a century were a mirror image of the country’s military and commercial power, making the currency incontrovertible in global trade and as vehicle between non-US dollar currency pairs
On a regional plane, the opportunity has surely not escaped China’s monetary authorities – a flywheel suite of mutually supportive applications, serving the needs of Asian trade with yuan invoicing, boosted by foreign exchange transaction services (in any currency), loans and debt securities
And it is less of a leap of faith than commonly assumed that convertibility has been taking a backseat as the fragmentation of payment systems along regional lines gains momentum
It remains foolhardy to predict the speed with which such realignments may occur as the American Federal Reserve and Treasury Department are determined to buttress the status of the dollar as indispensable global financial pivot, supported by deep cash pools and loan capacities, a sprawling banking system and innovative digital finance
However, with China and the U.S. competing on every front, Chinese inconsistencies between a tightly ‘managed currency’ and frameworks for yuan internationalization need to be resolved
Currency services supporting the yuan on a regional basis are bound to introduce flexibility within financial control over exchange rates and foreign (or Chinese) capital movements
The matter of how much ‘control’ will give and how much ‘internationalization’ will gain may be unresolved but the trend is unmistakable…
Regional trade propelling the yuan’s standing
The US dollar is currently used in 50% of China’s international transactions, exposing China trade directly, or indirectly, to the American banking system
Because the country fully expects to drift from US dependencies sooner rather than later, the Chinese banking system, cross-border payment systems, retail foreign transactions and a digital currency network have been passing successive stages of internationalization
None of these initiatives, unfolding over recent years, has been putting the constraints of ‘control’ over currency management to the test but they ultimately will, in the name only of all-important independence from the long arm of the American financial system
Not unexpectedly, the U.S. Administration is earning what it bargained for
By loosening the ties with international partners, including China, U.S. go-it-alone policies open a range of options which both allies and competitors are starting to use to the full
While European allies might seek to enhance the standing of the euro in cohesion with U.S. Central Bank policies, China’s perception of dollar dependencies has more far-reaching implications
The ultimate recognition of the yuan as reserve currency by the Central Banking system remains some time off, but its dominance as vehicle of choice over regional South-Asian trade is in the making
According to the World Bank, in 2022,
- value of East Asia & Pacific exports (FOB) was $8.5 trillion and value of imports (CIF) was $7.7 trillion
- value of South Asia exports (FOB) was under $0.5 trillion and value of imports (CIF) was $0.7 trillion
With GDP growth trends expected to range between 5.5% and 6.5%, Asian countries will surpass China’s own economic growth, turning regional trade into an engine of choice for Chinese policy makers
Geopolitics of the yuan
China has come to recognize that the scope and weight of the U.S. dollar is pervasive
Trade and export to the American market are a significant dimension in the difficult negotiations embracing tariffs, technology import restrictions and quotas
However, in the broadest, China’s strategy is driven by targeted industrial policies aiming at global dominance with world-betting manufacturing capacity in electrical vehicles or renewables (such as solar panels) or – going forward – in robotics or medical breakthroughs
What all these strategies have in common is tight integration of supply chains – from raw materials to R&D to logistics and distribution – and mass production on a scale aimed at global dominance
Because the build-up of these industrial policies must proceed with speed, notably to take advantage of hesitant responses in Western markets, any potential American interference, by way of access to dollar financing, is a potential risk to be addressed upfront
Energy
Access to energy is a perennial factor of strategic uncertainty for Chinese industry
China is actively promoting and increasing oil purchases from the Middle East using the yuan (with limited deals happening, especially with Saudi Arabia and the UAE)
While the yuan has been facing headwinds because of liquidity issues and reluctance of oil producers to accept the currency, China’s rapidly growing trade with the Middle East is the key factor that anchors the long-term potential for broader yuan use by Gulf states, with trade almost quadrupling (2009-2023)
Dollar derisking
A conflict around the future of Taiwan is a subject of strategic uncertainty writ large
Many commentators seem to rely on the premise that integration of the island-state with the China Mainland is a real possibility in some, as yet undetermined, form
However, it is not necessary to make assumptions on this major geopolitical development to identify some of the major preemptive steps China’s leadership has been preparing to loosen the country's dependencies
The share of dollar-based transactions in China’s international trade and its downward trend might turn-out to be one of the most reliable indicators of things to come
The degree of urgency in expanding the yuan’s global trade weight observed over the next two years – within the frame of the Trump presidency (2028) and of the celebration of the centennial of the Chinese Communist Party (2029) – will carry significant weight
If yuan internationalization – with features such as off-shore yuan markets – gains in preeminence, and if control of the currency is managed with pragmatism (if not in formal announcements), the implications will not be ignored