By Nathaniel Taplin Dec. 26, 2023
Chinese assets have had a terrible year—but China’s currency is gaining ground as an international payments option.
The
yuan’s status as a global currency still faces a huge obstacle in the
form of China’s own capital controls. Even so, rising willingness to
conduct trade in yuan could help insulate China’s economy,
at least to an extent, in the event sanctions were imposed in a
hypothetical future conflict with the West. It also could become a
source of structural support for the yuan itself, even assuming weaker-than-expected Chinese growth in the years to come.
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The
headline numbers are eye-opening. China’s cross-border yuan settlement
for merchandise trade has more than doubled, on a monthly basis, since
mid-2020—and is now equal in value to over a quarter of China’s top-line
goods trade, official figures from the central bank and Commerce
Ministry show. That is up from roughly 13% in 2019, and takes the ratio
back to where it sat in late 2015—before China’s surprise yuan devaluation and tighter capital controls knocked back the previous big push for yuan internationalization.
In
October, 3.6% of international payments globally were made in yuan,
according to data from Swift, the international financial-messaging
service. That was up from less than 2% in January and marginally below
September’s 3.7%, which was a record high. And the real number might be
higher, since some yuan transactions—particularly any involving U.S.
sanctioned entities—wouldn’t be conducted using Swift.
Much
of this is the Russia effect. Following the outbreak of the Ukraine war
and Western sanctions, Russia has replaced Saudi Arabia as China’s top oil supplier
and become a key market for Chinese autos. And China and Russia now
conduct the lion’s share of their bilateral trade in yuan: Close to two
thirds of Russia’s imports from China were already invoiced in yuan
by the end of 2022, according to the European Bank for Reconstruction
and Development. Many of China’s other international trade
partners—particularly those in the developing world less likely to take
the West’s side in any hypothetical conflict—will have taken note.
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There
are important caveats. Sanctions would still be hugely disruptive to
financial flows outside of trade and could hit China’s ability to deploy
its dollar reserves. At 3.6% of global payments, the yuan remains a
minnow compared with the dollar, at 47%, and the euro, at 23%. Capital
controls limit the attractiveness of the yuan
as an investment tool, which will continue to impede its role as a
reserve asset—particularly in the developed world. And developed
democracies remain critical markets for China: Presumably in a crisis,
many of them would sign on to U.S. sanctions and refuse to accept yuan.
That doesn’t mean the yuan’s rising profile is unimportant though—particularly given the ways global trade is rerouting
amid Western efforts to “derisk” China ties. Places such as Southeast
Asia are becoming increasingly important hubs where Chinese goods are
assembled into final products, which are then sent on to the U.S. In the
future, it isn’t difficult to imagine a rising percentage of exports of
Chinese components headed to such places priced in yuan—and some such
intermediary countries electing to hold higher yuan reserves as a
result.
China’s
economy is struggling, but it remains an export powerhouse. And the
political fragmentation of global trade is starting to migrate into
payments systems as well. That could have far-reaching consequences,
both in Asia and farther afield, in the years to come.
Write to Nathaniel Taplin at nathaniel.taplin@wsj.com