RMB internationalization made quiet progress in 2023

Written by Kapronasia || January 02 2024

Internationalization of China’s currency has moved more slowly than many analysts had expected. The renminbi remains far behind not only the dollar but also the euro as a reserve currency, and several percentage points behind the both Japanese yen and pound sterling in that area. However, when it comes to payments, China’s currency has done better of late. From January 2023 to October 2023, its share of cross-border payments jumped from 1.9% to 3.6%, according to the International Monetary Fund (IMF).

If the steady increase of the renminbi’s share of cross-border payments continues, 2023 might turn out to be an inflection point for internationalization of the Chinese currency. We reckon that it was not any single factor that spurred acceleration of its use in payments last year. Rather, it was the confluence of organically growing trade settlement in renminbi, the coming to fruition of bilateral currency swaps between the People's Bank of China and more than 30 central banks, the growth of renminbi clearing centers offshore providing related liquidity, and finally, the impact of geopolitical tensions and sanctions imposed by the U.S. and its allies on Russia.  

It is interesting to observe the uptick in Chinese banks’ use of the renminbi for lending overseas, which by October 2023 had reached 28% compared to 17% in late 2021. Some of this shift can be attributed to higher dollar funding, making host countries more receptive to receiving funding in the Chinese currency. Further, significant capital outflows from China are a perennial concern for Chinese policymakers given their focus on maintaining systemic financial stability and increase Beijing’s hesitancy to lend in dollars.

With regards to trade settlement, the most important development in 2023 was a deal reached between China and Brazil in April to jettison the dollar in two-way trade and financial transactions: The two nations will now use their own currencies instead. Given that Brazil is the largest economy in Latin America, that China is Brazil's top trading partner (with a record US$150.5 billion in bilateral trade in 2022) and the agreement is comprehensive – unlike deals Beijing inked with France and Iraq – this is a key win for China in its bid to encourage greater global use of the renminbi.

There appears to be growing momentum for the renminbi’s use in Latin America as evidenced by Argentina’ decision to reportedly pay part of the US$2.6 billion due to the IMF in October with Chinese yuan. Argentina completed the October payment with the IMF's reserve assets, known as special-drawing rights (SDRs), and Chinese yuan from a currency swap line with Beijing, a source told Reuters. China’s swap deal has helped Argentina work around a lack of foreign exchange as key agriculture exports fell sharply due in part to a severe drought.