21 October 2018
Last month’s US$400 billion China-Russia natural gas deal reaffirms a decision by major emerging economies to move away from the US dollar into their national currencies. Photo: Bloomberg
Last month’s US$400 billion China-Russia natural gas deal reaffirms a decision by major emerging economies to move away from the US dollar into their national currencies. Photo: Bloomberg

Chinese yuan forging ahead in quest for global status

Last month’s US$400 billion, 30-year deal on natural gas between China and Russia, the biggest such deal ever, has implications beyond energy resources and bilateral relations. For one thing, it reaffirms a decision by major emerging economies to move away from the US dollar into their national currencies. At the same time, it is a big step toward the internationalization of the renminbi, or yuan, China’s national currency.

While the actual contract signed by Gazprom and China National Petroleum Corporation has not been made public to protect “commercial secrets”, President Vladimir Putin said in Shanghai at the time that Russia and China were seeking to expand settlement in local currencies to protect themselves from exchange rate fluctuations of major currencies.

During Putin’s visit to Shanghai, in a move strong in symbolism, Russia’s second largest bank, VTB, signed an agreement with the Bank of China to pay each other in their domestic currency, bypassing the US dollar.

Since the natural gas deal reached in May is likely to be followed by other massive energy accords between the two countries, their agreement to use the renminbi and ruble for settlement is potentially a major setback for the US dollar’s global dominance.

Russia is taking steps to shield itself from additional western sanctions over Ukraine that may deprive it of access to the US dollar market while China is taking advantage of the opportunity to increase the role of the renminbi.

The Financial Times has reported that not just Gazprom but Russian companies in general are preparing to switch contracts to Chinese and other Asian currencies.

China has been encouraging use of national currencies in cross-border trade. According to Reuters, cross-border trade settled in renminbi amounted to 550.2 billion yuan, or US$88.6 billion, in January and 437.8 billion yuan in February, accounting for 23.5 percent and 28.6 percent, respectively, of total trade.

In 2009, China launched a pilot program to settle cross-border trade in yuan. In the following years, it included more companies and regions and, last Friday, the People’s Bank of China announced that all importers and exporters can now settle cross-border trade in renminbi.

Also since 2009, China has reached currency swap agreements with a score of countries to help facilitate bilateral trade and investment. Such swaps of national currencies bypass the US dollar.

The visit by Chinese Premier Li Keqiang to Britain this week is likely to result in the further internationalization of the yuan as London seeks to play a bigger role as an offshore renminbi trading hub.

Last year, Deutsche Bank predicted that use of the Chinese currency in cross-border trade settlements would reach 6 trillion yuan, or US$988 billion, in 2014, accounting for about 20 percent of China’s global trade volume.

Also in 2013, the renminbi jumped from the 17th most traded currency to the ninth, putting it among the world’s top 10 most traded currencies for the first time, according to the Bank of International Settlements.

By February 2014, the yuan had risen to seventh place, according to the global transaction services organization Swift, behind the US dollar, the euro, sterling, yen, Canadian dollar and Australian dollar.

For both practical reasons and national prestige, China is determined to make the renminbi a mainstream currency, like the US dollar, the euro, sterling and yen.

Euromoney has quoted currency experts from the Industrial and Commercial Bank of China as saying that the renminbi could become a mainstream currency as early as 2017, accompanied by liberalization of the capital account. That is to say, the currency will be fully convertible.

Standard Chartered Bank has predicted that the yuan will be the world’s fourth payment currency by 2020, exceeded only by the US dollar, euro and sterling.

China’s and Russia’s efforts to use their national currency parallel attempts by other emerging economies, such as Brazil, India and South Africa. These five countries, collectively known as BRICS, account for 42 percent of the world’s population and 25 percent of global GDP.

They have already announced plans to set up a currency reserve pool and a development bank, which are meant to play much the same role as the IMF and the World Bank. Those institutions are dominated the European Union and the United States, respectively.

Recognition of the rise of China’s financial clout was recently voiced by IMF head Christine Lagarde, who said she “wouldn’t be surprised if one of these days the IMF was headquartered in Beijing” instead of in Washington.

That is, unless China and its BRICS partners move to supplant the IMF and the World Bank with their own institutions.

Frank Ching is a Hong Kong-based writer on Chinese affairs.

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Frank Ching opened The Wall Street Journal’s Bureau in China in 1979. He is now a Hong Kong-based writer on Chinese affairs.

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