Photo: iStock
Dániel Szakács
21/06/2023 08:00
The internationalisation of China's currency is a long-term strategy for China, as it could contribute to China's own economic development and strengthen its international economic influence. The Asian country is currently seeking to conclude agreements with as many countries as possible to settle international trade flows in renminbi instead of dollars. Saudi Arabia and Brazil stand out in this effort.
Relations between Saudi Arabia and China have shown a clear convergence in recent months. The East Asian country has been instrumental in restoring diplomatic relations between Saudi Arabia and Iran and is also assisting Saudi Arabia in uranium production. Saudi Arabia is currently in active negotiations to have part of its oil sales to China in renminbi. This initiative is a move that could break the dominance of the US dollar in the global oil market and would be a clear sign of a shift by the world's largest crude exporter towards China and the Asian market. The move away from the dollar may be due to the Saudi kingdom's growing dissatisfaction with US security commitments. In the mid-1970s, during the Nixon administration, an agreement was reached whereby Saudi Arabia could only trade oil in dollar, in return for certain security guarantees from the US to protect the country.
Should Saudi Arabia actually trade with China in Chinese currency, the economic impact would be significant. On the one hand, it would strengthen the Chinese currency against the dollar and, on the other, it would increase China's international economic influence. At the same time, Saudi experts warn the Saudi leadership that such a major decision should not be taken prematurely as it would cause significant damage to the Saudi economy. This is because Saudi Arabia's currency, the Saudi riyal, is pegged to the dollar.
In addition to Saudi Arabia's rapprochement, the internationalisation of the Chinese currency is also supported by Brazil's moves. On 29 March, the Brazilian government announced that the South American country had signed a currency trade agreement with China, so that in future they will trade in their own currencies instead of the dollar, which acts as a proxy. According to the Brazilian Trade and Investment Promotion Agency (APEX), this will reduce costs, increase bilateral demand between the two parties and facilitate investment. The People's Bank of China (PBOC), China's central bank, has previously said that this type of agreement will increase the use of the renminbi for cross-border transactions, as well as boost investment. Brazil and China have excellent relations, with China being the South American country's largest trading partner. Last year, trade between the two countries reached a record high of USD 150.5 billion.
It is worth noting that economic relations between China and Russia have also strengthened in recent months. This could also have a stimulating effect on the promotion of the Chinese currency globally, as the Russian-Ukrainian war has led to a number of sanctions against Russia, which have cut it off from the dollar-based economy and many of its trading partners. A spokesman for the Russian finance ministry said the renminbi was playing an increasingly important role in the state asset fund, which doubled its renminbi share to 60 per cent in December.
The share of Russian exports paid in renminbi rose to 14 per cent by September 2022, according to central bank data. This represents a sharp increase from 0. 4 per cent before the war began. Russian companies have also increasingly turned to the renminbi, issuing more than USD 7 billion worth of bonds in Chinese currency last year. In recent months, the renminbi-ruble has often been the most traded currency pair on the Moscow Stock Exchange in terms of daily turnover.
While Russia's use of the renminbi does not signal the end of dollar supremacy, it could herald the beginning of a more fragmented regime that could ultimately blunt the ability of the United States to weaponize financial sanctions.
The author is a junior international expert at the Magyar Nemzeti Bank, the central bank of Hungary