Digital Euro Association Blog

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

China’s growing clout makes the Belt and Road Initiative and RCEP trade bloc ideal platforms to push for yuan internationalisation, aided by Hong Kong’s financial centre strengths

Many countries – from Latin American states like Brazil to Southeast Asian nations – are calling for trade to be carried out in currencies other than the US dollar. Since the 2008 global financial crisis, the dollar’s supremacy has increasingly been questioned.

At the World Economic Forum in Davos in January, Saudi Arabia’s Finance Minister Mohammed al-Jadaan said the kingdom was open to trading in currencies other than the dollar, for the first time in 48 years.

Last month, Brazilian President Luiz Inacio Lula da Silva, while on a state visit to China, called for reduced reliance on the dollar for global trade. And, in March, Malaysian Prime Minister Anwar Ibrahim, also on a visit to China, revived the idea of an Asian monetary fund to address dollar reliance.

But these trends must be put into perspective. The dollar remains dominant in global foreign exchange reserves, accounting for 58 per cent in the fourth quarter of last year, according to the latest data from the International Monetary Fund.

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.


Belt and Road Strategy

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.

Hong Kong, the world’s largest offshore yuan hub, also has an important role to play, given its experience with CBDCs. In particular, the testing and adoption of the digital yuan in Hong Kong was a great first step. As it is, according to Swift, Hong Kong already processes more than 70 per cent of global offshore yuan payments.

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.

CBDCs are emerging across Asia. As a pioneer, China’s digital yuan push is paving the way for its neighbours. Whether with the belt and road or within the RCEP, China’s efforts to encourage cross-border use of the yuan will only enhance interoperability for other CBDCs, from Thailand to Japan – both of which have started digital currency trials.

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.

This article was prepared by the author/s. The views expressed in this article are the author’s own and do not necessarily reflect the views of the Digital Euro Association.


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