China’s renminbi has been on a wild ride this year, and it’s not just because of rollercoaster-like fluctuations in its value. The currency has been underperforming, especially against the US dollar, with an 8.5% depreciation from its January lows. However, this seeming setback is part of a larger, more intriguing story: the renminbi’s growing influence on the world stage.
China Emerges as an Unexpected Twist in Global Finance
In a surprising turn of events, the weaker renminbi has been gaining ground in global payments. From a modest 1.9% share in global payments at the start of the year, it has impressively doubled to 3.6% by October 2023.
This growth, albeit still small compared to the dominant US dollar and euro, signals a potential shift in the global currency landscape.
It’s particularly noteworthy considering that China has been pushing for the internationalization of its currency since 2004, but with limited success until now.
This surge in cross-border use of the renminbi is partly fueled by China’s strategic moves to use its currency for international trade settlements. Nearly 30% of China’s trade in goods and services is now settled in renminbi, a significant leap from previous years.
This shift isn’t just about economics; it’s also a geopolitical chess move. China is reducing its reliance on the US dollar and other G7 currencies, particularly in the wake of Western sanctions against Russia and escalating tensions with the US over Taiwan.
Geopolitical Chess and Financial Strategies
China’s push to internationalize the renminbi isn’t happening in a vacuum. It’s a response to a complex global landscape, where financial and geopolitical strategies intertwine. The country’s development of its own international payment system, Cips, is a case in point.
This system, which operates independently of the Swift interbank messaging system, has gained traction, especially since it’s harder to trace and thus potentially more attractive in the face of Western sanctions.
Furthermore, China has been proactively establishing bilateral currency swaps with over 30 central banks. These swaps, once dormant, are now being utilized, as seen in Argentina’s withdrawal of $1bn in renminbi to cover IMF repayments.
China’s efforts to boost offshore renminbi liquidity through these swaps and the establishment of renminbi clearing centers are part of a broader strategy to cement its currency’s place in international finance.
However, this growing influence comes with a caveat. The renminbi’s lack of convertibility poses a significant barrier to its broader adoption.
Companies earning renminbi through exports find their options for using the currency limited, often restricted to purchasing Chinese goods or paying off debts in renminbi. This dynamic increases other countries’ economic dependence on China.
In contrast to its rising stature as a trade currency, the renminbi lags in its role as an investment currency. Foreign investment in China’s onshore markets, particularly in fixed-income securities, has been on the decline.
The lack of currency convertibility, coupled with China’s unique economic and political landscape, makes the renminbi a less attractive option for foreign investors.
China’s currency revolution on the global stage is a story of paradoxes and complexities. The renminbi’s growing international presence, driven by strategic geopolitical moves and innovative financial instruments, contrasts with its limitations as an investment currency.
This dichotomy reflects China’s broader ambitions and challenges as it navigates the intricacies of global finance. As the renminbi continues to make waves, it remains to be seen how this currency revolution will reshape the financial world order.
