China Uses Belt and Road Initiative to Promote Yuan Internationally
China’s Efforts to Boost the Yuan’s Global Acceptance
China is leveraging loans provided through its Belt and Road Initiative (BRI) to enhance the international standing of the yuan. This move comes as the country has already increased the yuan’s share of global payments to record levels. During the recent Belt and Road Forum in Beijing, China’s policy banks signed several loan agreements denominated in yuan with foreign lenders.
While Western nations largely chose to stay away, the forum saw participation from many countries in the Global South. The presence of Russian President Vladimir Putin also lent support to Chinese President Xi Jinping’s vision of a new, multi-polar world order. Alicia Garcia Herrero, Asia Pacific chief economist at Natixis, pointed out that countries primarily using the yuan for trade settlements are those that have strategic agreements or have visited Beijing, with Russia being the most prominent example.
China’s efforts to increase the yuan’s acceptability have been aided by geostrategic tensions and higher U.S. interest rates. According to SWIFT data released on Wednesday, the yuan’s share of global payments by value reached a record high of 3.71% in September, almost double the figure of 1.91% recorded in January. However, the yuan’s share remains minimal compared to the dominance of the U.S. dollar, which stands at 46.6%.
Funding Belt and Road Projects Boosts Yuan Internationalization
The ongoing trade tensions between China and the United States, coupled with the conflict between Russia and Ukraine, have motivated Beijing to encourage more countries to settle in yuan, despite the currency’s depreciation against the dollar. The financing of Belt and Road Initiative projects has also helped China revitalize the process of yuan internationalization. It has been a decade since President Xi launched the BRI strategy, aimed at establishing global infrastructure and energy networks connecting Asia, Africa, and Europe.
Given the increasing volatility in global currency markets, the BRI presents a valuable opportunity to expand the yuan’s international influence, as noted by China International Capital Corp (CICC). The China Development Bank, a state policy lender, has signed loan agreements denominated in yuan with Maybank from Malaysia, Egypt’s central bank, and BBVA Peru to support BRI projects. Additionally, the Export-Import Bank of China has inked a yuan-based loan agreement with Saudi National Bank, while the Bank of China has facilitated Egypt in issuing Africa’s first yuan-denominated Panda bonds. To further support BRI projects, Beijing has allocated an additional 80 billion yuan ($10.94 billion) to its Silk Road Fund.
Challenges Ahead for the Yuan’s Global Aspirations
Although the yuan has made significant strides, it still has a long way to go before challenging the dollar’s dominance. Its limited share in the oil trade and foreign investors reducing holdings in Chinese stocks and bonds are factors that hinder its progress. Moreover, a currency favored by a specific bloc has less chance of becoming a global reserve currency, cautioned Natixis’ Garcia Herrero. She added that a reserve currency is never the currency of a group of countries and suggested that while targeted agreements with all BRI countries might be possible, the yuan will not achieve true global recognition as an international currency.
(Note: The exchange rate is $1 = 7.3157 renminbi)
