China's push to internationalize the yuan in global finance is working, an economist said.
The yuan has seen a significant boost in its share of global payments this year.
It is still minuscule compared to dollar payments, "but the growth could be pointing to a change."
China might be mired in economic problems, but Beijing's plans of promoting the yuan in global trade and finance are making some headway.
The currency has seen a major boost in its share of global payments this year, from 1.9% in January to 3.6% in October, according to a chief economist for French investment bank Natixis. And even though the yuan has wobbled this year versus the greenback, 2023 has been an important year for China's efforts to promote its currency abroad.
"That very same weak renminbi has achieved something quite impressive in 2023: a fast increase in its cross-border use," Alicia Garcia-Herrero wrote in the Financial Times on Wednesday.
China has been encouraging the use of yuan in trade and investment deals with other countries. It's a move that is emblematic of the "dedollarization" trend being seen as countries try to ween off of their dependence on the dollar.
There's still a long way to go — a 3.6% of global payments is minuscule compared to the 47.25% that is conducted in the US dollar and the 23.36% in euros.
"But the growth could be pointing to a change," Garcia-Herrero said.
The People's Bank of China has reported a steep increase in yuan-denominated current account transactions, the economist wrote. And about 30% of goods and services traded in and out of China were settled in the yuan.
There are several drivers of the change, Garcia-Herrero said, a key one being geopolitical concerns. Ever since the US slammed Russia with sanctions following the invasion of Ukraine in 2022, China has become increasingly keen on getting away from the dollar and promote the yuan in deals with trade partners.
To boost the globalization of the yuan this year, China increased its share of total cross-border lending to 28% in October from 17% at the end of 2021. And the People's Bank of China has signed bilateral currency swaps with more than 30 central banks, the economist said, including Saudi Arabia and Argentina.
"These swap lines used to sit idle in host central banks but they are now starting to be withdrawn given some emerging countries' growing financial needs," Garcia-Herrero wrote. "A notable example is Argentina, which has already withdrawn the equivalent of $1bn in renminbi from its swap line to cover repayments to the IMF."
What's more — because China has its own international payment system which is difficult to trace — the gains the yuan has made in global cross-border payments may be undercounted.
But Garcia-Herrero added that the advances the yuan has made in global finance have not translated to a bolstering of the renminbi as an investment currency, and foreign investment in China's onshore markets have been dwindling.
"On the one hand, China's economic dominance is translated into leverage to impose its currencies," the economist wrote. "At the same time, the lack of convertibility of the Chinese currency makes it very difficult for investors keen to buy up renminbi assets."
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