In the wake of the Eastern dollar
The process of de-dollarisation, i.e. the reduction of the global influence of the dollar, has received increasing attention in recent years. The reason for this in some countries is the fear that Washington will use its influence as a weapon to achieve its political goals, denying the economic sovereignty of less powerful states. 
In the wake of the Eastern dollar
The Economics of Geography

In the wake of the Eastern dollar

Photo: iStock
Mátyás Karl - Máté Ladics 08/11/2024 11:06

The process of de-dollarisation, i.e. the reduction of the global influence of the dollar, has received increasing attention in recent years. The reason for this in some countries is the fear that Washington will use its influence as a weapon to achieve its political goals, denying the economic sovereignty of less powerful states. As a result, the dollar's share of global foreign exchange reserves has fallen by 12 percentage points over the past 20 years, and the use of home and alternative currencies such as the Chinese yuan, more formally known as the renminbi (RMB), has become more common in the Global South.

The internationalisation of the renminbi became an objective of the Chinese central bank in 2006, with the aim of increasing the country's political influence and economic competitiveness. The benefits of an international currency include lower transaction costs, macroeconomic stability and increased foreign policy leverage. The disadvantages include currency appreciation and reduced monetary policy autonomy.

Following the 2008 economic crisis, Beijing has approached the internationalisation of its currency from two directions: on the one hand, by developing and gradually opening up domestic financial and capital markets, and on the other, by increasing the use of the RMB abroad. As a result, the yuan has become more widely used in cross-border trade, especially in China's neighbouring countries and in the Global South. By 2022, 31 clearing banks supported RMB payments worldwide. The Asian superpower has also set up its own payment system, the Cross-Border Interbank Payment System (CIPS), which mainly conducts transactions in RMB. Its turnover is low compared to SWIFT and its function is different.

China is increasingly seeking to conduct agricultural and commodity trade and lending through its own commodity exchanges and banks in RMB. An example is the Belt and Road Initiative, in which more than 140 countries are participating. Thanks to these efforts, the renminbi is playing an increasing role in global payments. Historically, China has opted for monetary policy autonomy and a fixed exchange rate in the monetary trilemma, abandoning free capital flows. After the speculative attack in 2015, the government introduced a managed floating exchange rate regime. The international role of the yuan, however, will remain limited as long as capital flows and convertibility are restricted. Dollar de-dollarisation is currently more part of China's risk management strategy.

Although the renminbi's popularity and use has increased in recent years, especially in China's neighbourhood, it is not yet considered a serious challenger to the dollar. Currently, the yuan is the world's fifth most popular reserve currency and the fourth most widely used currency in the SWIFT system. The yuan's share of global foreign exchange reserves, at around 2 per cent, is far below previous expectations, and it can be said that Beijing is now almost exclusively focused on promoting the yuan through trade.

This is demonstrated by the fact that in March 2023 it became the most widely used currency for cross-border transactions in China. The exclusion of Russia from the SWIFT system, which led Moscow to make the renminbi its primary foreign currency, contributed greatly to this. In addition to Russia, several countries already do business with China in yuan. Most of them are neighbouring countries of the Asian superpower and countries of the Global South, such as Brazil and Argentina, but energy companies from Western countries also occasionally trade in yuan with their Chinese counterparts.

The authors are analysts at the Makronóm Institute

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