Briefly: China and Brazil have developed a plan to trade in their own currencies rather than the USD. Several countries (eg Iran, Pakistan, and Russia) already participate in similar schemes, which are designed to skirt the dollar’s dominance as a global reserve currency.
And it’s not hard to understand why China wants more of its yuan (or renminbi) in circulation. The internationalisation of the yuan means:
- 🏗️ Less exchange rate risk for China’s businesses and investors
- 💸 Higher demand for China’s bonds (meaning China pays lower interest on its debt), and
- ❌ More options to impose and/or circumvent financial sanctions
The yuan’s internationalisation took a step forward in 2016 when it was included in the IMF’s basket of currencies to support lending. Some banks now expect the yuan to be the third-largest reserve currency by 2030.
Intrigue’s take: Mighty as China might be, its yuan won’t supplant the US dollar any time soon. And China wouldn’t actually want such an outcome right now.
Being a truly global reserve currency would mean Beijing allowing the world to freely buy and sell yuan. But that would mean Beijing removing many of the economic controls it has in place. And ultimately, that would mean Beijing choosing between surging unemployment and even higher debt.
For now, it’s more likely we’ll see some countries look to make a statement and hedge risks by using yuan. But they (along with the rest of the world) will also need to use dollars and Euros for a while yet. The USD and Euro are baked into the global economy, and replacing them won’t be quick, easy, or even desirable.
Also worth noting:
- Only 1.33% of global payments were in yuan in January, compared with 40% in US dollars, 38% in Euros, 7% in pounds and 3% in yen. The world’s central banks hold around 60% of their reserves in USD.
- The BRICS – Brazil, Russia, India, China, and South Africa – are reportedly developing a new joint currency, though the idea has its critics.
- Brazil did a record $152.8B in bilateral trade with China last year, making Beijing its largest trading partner.