How China’s digital yuan can chip away at the US dollar’s dominance

Beijing is trying to change this situation. So what role can the digital yuan – China’s central bank digital currency (CBDC) – play in de-dollarisation?

There were high hopes for the internationalisation of the yuan in the early 2010s, but the results have been mixed and even slightly disappointing. There has been progress in the past few years but it has been relatively modest, with the yuan hovering around the fifth-most-used currency in global payments, according to the Swift financial messaging system, after climbing up from 35th in October 2010.

Last year, the Standard Chartered Renminbi Globalisation Index, a measure of international yuan usage, rose by 26.6 per cent, topping 2021’s 18 per cent increase. Chinese official data also showed a steady increase in China’s yuan-settled cross-border payments and receipts, with last year’s figure up 15 per cent to 42.1 trillion yuan (US$6.1 trillion). Last March, for the first time, more cross-border transactions with China were settled in yuan than the dollar. 

The adoption of the physical yuan for trade settlement and as a global reserve currency has been limited by China’s capital and foreign exchange controls. These also apply to the digital yuan. But just as the physical currency has specific cross-border applications, so does the digital yuan – and it may consequently boost the global wholesale use of the Chinese currency.

The rise of the digital yuan makes it easier for international trade transactions usually denominated in dollars to become yuan-denominated, thus challenging the dollar’s dominance.

The Belt and Road Initiative would be the best possible avenue for China to start seriously internationalising the digital yuan. Given their close trade and geopolitical ties with China, belt and road partner countries could more easily accept the digital yuan. For them, the digital yuan may be faster, cheaper and easier to use than the Swift system: interoperability will become a key element.

China can also leverage the Regional Comprehensive Economic Partnership and Hong Kong’s important role as a financial centre. Through the RCEP, Beijing can strengthen its trade ties with neighbouring countries and thus push for agreements to facilitate cross-border adoption of the digital yuan.

Further afield, China’s growing influence in the Middle East and North Africa can also be a platform for yuan internationalisation. China’s role in the restoration of Saudi-Iranian diplomatic relations suggests Beijing is becoming a power player in region.

Once more Asian countries deploy their CBDCs, the area encompassed by the RCEP, the world’s largest free-trade agreement, could become a market dominated by central bank digital currencies. Globally, de-dollarisation is a growing trend. Just how far that process goes remains to be seen.

This article originally appeared here.