How China is transforming into a financial giant
Communist Yuan will soon challenge capitalist Dollar for the #1 spot
(An edited version of this was published in the Chinese media Global Times: Trade prowess will inevitably accelerate pace of internationalization of yuan)
In 1995, China’s share of global manufacturing was just 4%, while the US was five times bigger. Merely fifteen years later, China surpassed the US to become the world’s manufacturing powerhouse, and has increased its dominance since then. The next frontier for China is the financial sector, which will involve formidable challenges such as transforming the Chinese yuan into an international currency. However, as Ray Dalio points out, the world’s largest trading nation has always held the most dominant currency and the global reserve currency. Thus, history and logic are on the side of China.
American Narrative about Yuan
Of course, detractors would point out that King Dollar still rules supreme and the yuan has relatively insignificant shares of the world’s reserve currencies and SWIFT transactions – less than 5% for both. Furthermore, the dollar supremacists enjoy pointing out that the yuan is not fully convertible and faces capital controls.
However, such parochial views disregard the bigger trends and alternative options for the internationalization of yuan.
Global Yuan - Examples
Let’s start with the fact that the yuan has surpassed the US dollar to become the most-used currency in China's cross-border transactions. This is quite an astonishing development, since yuan’s share was close to 0% in 2010, but is now nearly 53%.
In 2023, yuan-based cross-border receipts and payments amounted to a staggering ¥52 trillion. And 30% of goods and services traded by China are now bought and sold in RMB (yuan).
Recently, yuan also surpassed the Japanese yen to become the fourth most used currency in global payments. In global trade finance, yuan ranks #3 in the world — the yuan even briefly surpassed the Euro in late 2023.
There are still many American “experts” – like Peter Zeihan – who claim that the yuan has no value outside China. These delusional China hawks should study how 95% of Russia-China trade is now conducted in yuan and rubles. The yuan has also become Russia’s primary foreign trade currency. Russians can even open up bank accounts in yuan now.
There are countless examples of countries around the world embracing yuan for trade – and this includes American allies like Australia, where companies are selling iron ore for yuan.
China’s path different from the US’
Ironically, the dollar’s extraordinary privilege will also be the primary cause for its demise. Because, in order for everyone in the world to have easy access to the dollar, the US prints trillions of dollars, and runs massive trade and fiscal deficits. Thus, the US created its own debt trap. Plus, the US has become so dependent on this rigged system that it must maintain a brutal empire to protect the dollar.
China does not want to repeat the American model. In fact, there is a way for yuan to become the dominant trade currency, without becoming the world’s reserve currency.
Consider the example of China-Saudi Arabia trade, which is about $100 billion a year. Right now, as shown in the chart below, China imports $65 billion of Saudi goods in USD, and Saudi Arabia imports $35 billion of Chinese goods in USD. Here, a total of $100 billion is required for bilateral trade.
Now, imagine if China pays Saudi Arabia in yuan and dollar. What will Saudi Arabia do with the yuan? Buy Chinese goods, of course. Thus, the yuan is recycled, and it’s a win-win situation.
The above chart shows the optimized situation, where the need for the US dollar plummets 70% -- from $100 billion to $30 billion.
Hello Petroyuan, goodbye Petrodollar!
If you remember that China is the #1 trade partner for about 130 countries, the repercussions of gradual de-dollarization in trade will have significant effects, including reduction in the amount of the dollar held in foreign exchange reserves.
In fact, the concept of FOREX will become less relevant as countries increasingly trade in local currencies.
Internationalization of Yuan - More Examples
There are many other tools to boost the internationalization of yuan. For example:
• China’s central bank (PBOC) has bilateral currency swap agreements with more than 40 countries and regions.
• There are 30+ yuan-clearing banks in 20+ countries to facilitate trade in RMB.
• CIPS – a potential alternative to SWIFT – was introduced in 2015 and now has 1300+ participants from 100+ countries.
• Foreign companies and governments are borrowing in yuan through the so-called (onshore) panda bonds and (offshore) dim sum bonds.
Digital RMB
Moving forward, digital currency-based systems will become more popular, as evidenced by the China-led mBridge project, which has Saudi Arabia and the UAE as members. This will allow countries to totally circumvent the US dollar, while increasing efficiency and reducing the cost of transactions. In the near future, Chinese e-commerce behemoths like Tencent, AliExpress, Shein and Temu will be using mBridge to serve customers all over the world.
Silk Road enables Chinese Yuan
Finally, let’s not forget the Belt and Road Initiative, the largest infrastructure and development project in human history. Loans in yuan can be used to build highways, railways, seaports, 5G network and so on.
Conclusion
China will continue opening up its financial sector. And Western financial firms are eagerly waiting to tap the abundant savings of Chinese families. One day, Shanghai will rival Wall Street and London, but it must be done gradually and prudently to avoid the traps of casino capitalism that has ruined the American economy. A modern financial system with Chinese characteristics is on the way. Get ready for exciting times.
— S.L. Kanthan