8 Mar, 2022
Russia’s invasion of Ukraine will
have only a limited impact on Beijing’s push to internationalise the
yuan, and its long-term success as a more widely utilised global
currency will need to run parallel with China’s deeper financial
reforms, according to analysts.
Their assessment came
after US Federal Reserve chair Jerome Powell said at a US Senate Banking
Committee hearing last week that the Ukraine war may “change the
trajectory” of China’s moves to insulate itself from a global financial
system that is heavily tied to the US dollar.
But in a
note to its clients, research firm Rhodium Group ruled out the
Cross-Border Interbank Payment System being a replacement for the Swift
financial messaging system, with only 75 direct participants. The firm
also stated that the basic constraints of China’s trade surplus and
capital controls mean that the odds of the yuan’s international use
expanding are “remote”.
“China is in a dilemma. On the one hand,
it badly wants to internationalise its currency. But on the other hand,
it is quite reluctant to open its capital account and liberalise its
financial sector,” said Edwin Lai, the author of One Currency, Two
Markets: China’s Attempt to Internationalize the Renminbi and an
economics professor at Hong Kong University of Science and Technology.
Data
from the International Monetary Fund (IMF) showed that the yuan is the
world’s fifth-largest reserve currency, with central banks holding the
equivalent of about US$319 billion worth of yuan reserves in the third
quarter of 2021.
“The internationalisation of the
renminbi still pales in comparison with the use of the dollar. Central
bank holdings of the yuan are only about 2.5 per cent of their total
reserves. By comparison, the dollar is over 50 per cent of reserves,”
said Jeremy Mark, non-resident senior fellow at the Atlantic Council and
a former IMF official, using the name of China’s currency.
He added
that while the yuan is used for global trade invoicing, its use is still
limited. Also, the yuan is not broadly employed for global investment
purposes with a focus on Chinese securities.
“The key reason for this
is that China continues to impose restrictions on the free movement of
capital in and out of the country, and the renminbi itself is not freely
tradeable,” Mark said. “Until China liberalises its capital account and
frees up controls on its currency, the renminbi’s international role
will be limited.”
Information from The Observatory of Economic
Complexity showed that China is the biggest trading partner for Russia.
Additionally, official figures show that bilateral trade between the two
rose by 38.5 per cent during January and February, year on year,
marking the highest growth rate for the first two months of any year
since 2010.
It was also reported that there have been
enquiries from Russian firms about opening new bank accounts at Chinese
state banks in Moscow, as a way to help mitigate the negative impacts on
business transactions due to international sanctions.
“Even if
Russia uses the renminbi more in its transactions, it will not help the
international use of the renminbi too much,” Lai said. “Russia is not a
very large economy at about 2 per cent of the global [gross domestic
product].”