The emergence of the yuan as an alternative global reserve currency advanced last week with the Argentine central bank making a loan repayment valued at US$1 billion to the International Monetary Fund (IMF) in the Chinese currency.
It was the first time that Argentina had used freely available yuan from its currency exchange to pay an external international organization. This money was intended to finance imports from China, but officials had already anticipated that it could be put to other uses.
Sergio Massa, Argentina’s economic minister, said: “The payment of the June maturities was made without using US dollars but instead by using SDRs [Special Drawing Rights] and yuan.”
In the dynamic landscape of global economics, the interplay between currencies and geopolitical power is a defining factor.
China, as an emerging global economic powerhouse, has been working strategically to elevate its currency, officially known as the renminbi (RMB), to international prominence.
Capitalizing on developing-world concerns over Washington’s perceived weaponization of the US dollar, Beijing has seized an opportunity to promote the renminbi as an alternative reserve currency.
For decades, the US dollar has reigned as the world’s primary reserve currency and the linchpin of the international financial system.
Its widespread use in trade, investments, and central bank reserves has granted the United States significant economic influence, but it has also raised concerns among developing nations due to the potential weaponization of the dollar for political ends.
Washington has sometimes imposed financial sanctions on countries, restricting their access to the US financial system and the dollar. These actions, perceived as punitive measures, have sparked concerns about the dollar’s vulnerability to political manipulation.
Developing countries, often in the midst of geopolitical tensions, feel vulnerable because of their dependence on dollar-denominated transactions, as currency volatility and sudden access restrictions can destabilize economies and impede development.
It’s a fact that many experts say is exacerbated by the United States’ dominance international financial institutions like the IMF and the World Bank.
It’s increasingly clear that China recognizes these concerns and is actively working to position the renminbi as an alternative reserve currency.
Positioning the yuan
What are the strategies that highlight how Beijing is capitalizing on the developing world’s grievances to promote the global use of the renminbi?
First, bilateral currency swaps. China has established numerous bilateral currency-swap agreements with other countries. These agreements enable direct trade and investment using the renminbi, reducing the reliance on the US dollar and mitigating transactional risks associated with dollar dominance.
Second, internationalization of the renminbi. China has taken steps to internationalize the yuan by allowing its use in trade settlements, investments, and financing activities. The inclusion of the renminbi in the IMF’s Special Drawing Rights (SDR) basket in 2016 was a significant milestone, boosting its global legitimacy.
Third, the Belt and Road Initiative. Beijing’s massive infrastructure project, the BRI, is a conduit for promoting the renminbi’s international use. By financing projects in participating countries using the renminbi, China’s creating demand for its currency and encouraging its adoption in global transactions.
And fourth, China has been actively developing its financial infrastructure, including offshore renminbi centers and institutions that support RMB-denominated transactions. These efforts bolster the renminbi’s credibility as a global currency.
Beijing’s strategic efforts to capitalize on the developing world’s concerns over the US dollar’s dominance reflect China’s ambition to reshape the global financial landscape. And, as judged by the Argentina/IMF situation, it seems to be working.
While challenges persist, the ongoing evolution of the yuan’s global presence warrants close observation from investors as it transforms the dynamics of international finance.
Nigel Green is founder and CEO of DeVere Gr0up. Follow him on Twitter @nigeljgreen.