Will the world trust China’s money?

Xí Jìnpíng 习近平 would like to convince countries to trade with each other using Chinese money, with no need to pay heed to the American dollar.

It’s part of a long-term project to internationalize China’s currency, the yuan, also known as the renminbi and RMB.

The yuan is already dominant in one crucial international relationship. Since the invasion of Ukraine, China has bought vast quantities of Russian oil and gas at knockdown prices.

Trade flows between Russia and China surged last year and by February 2023, the yuan had surpassed the U.S. dollar as the most traded currency in Russia. Bankers say it is possible for customers in Russia to hold their savings in yuan and for businesses to use Chinese money to trade abroad, even if the transactions do not directly involve China.

Russian President Vladimir Putin — whose war effort in Ukraine is effectively funded by Chinese money — is talking up the yuan.

Following a meeting with Xi Jinping in Moscow in March, Putin described the dollar and the euro as “toxic” and recommended countries in Asia, Africa, and Latin America to trade in yuan instead.

Scorn for the dollar has long been part of Putin’s anti-Western rhetoric. Yet ordinary Russians are crying out for dollars, if they can find them. Demand for the greenback caused the Russian ruble to fall to its lowest level against the U.S. dollar in a year in April 2023, partly because people who plan to escape the country want to take foreign currency with them.

Sanctions have forced Russia to use the yuan, and the Indian rupee

Sanctions on Russia are key to current U.S. foreign policy. They are strongly supported by the countries of the European Union, as well as the U.K., Japan, and many other nations.

As a result of the sanctions, Russian banks have been largely barred from global markets, and $300 billion of international assets have been frozen. Now the so-called “toxic” currencies, the dollar and the euro, account for less than half of Russia’s export payments, while the yuan makes up 16%, according to the Central Bank of Russia.

Daniel McDowell, author of the forthcoming book Bucking the Buck: U.S. Financial Sanctions and the International Backlash Against the Dollar, told The China Project: “Frankly, Putin doesn’t have much choice but to use the yuan because huge parts of the Russian economy are blacklisted from using the dollar, so he must therefore support the use of alternative currencies. However, I think the idea that Putin can snap his fingers and convince other countries to stop using the dollar is wishful thinking.”

McDowell — who is an associate professor of political science at the ​Maxwell School of Citizenship and Public Affairs at Syracuse University in the United States — said: “If you want to conduct business with Russia now, you almost have to depend on a currency other than the dollar. However, that’s quite a different thing from saying there’s going to be a widespread switch from the dollar to the yuan internationally.”

He notes that India, which has also declined to support the sanctions, is seeking to trade with Russia using its own currency, the rupee.

What can you buy with yuan?

When Xi Jinping traveled to Saudi Arabia in late 2022, he aimed to strengthen economic ties with the Middle East, and also to persuade the region to use the yuan to settle its oil and gas trades.

There has been some success with the strategy.

The French energy company Total recently accepted a payment in yuan for the sale to China of a consignment of liquified natural gas (LNG), which was sourced from the United Arab Emirates. In February 2023, the People’s Bank of China signed a provisional memorandum of understanding to create a yuan-based clearing system with Brazil.

Last week in Shanghai, visiting Brazilian president Luiz Inácio Lula da Silva made an impassioned call for an end to the dominance of the U.S. dollar: “Every night, I ask myself why all countries have to base their trade on the dollar. Why can’t we do trade based on our own currencies?”

It might not be so easy. McDowell said that international investors hold back from putting their money into yuan because of a lack of liquidity. He believes that the appeal of the yuan as an international investment is hindered by a system of capital controls, which restrict its convertibility and limit Chinese residents’ ability to move money out of the country.

“If you can’t find a buyer, you could lose out because you’re stuck with this asset, which is potentially losing value,” explained McDowell.

“If I’m a foreign investor, and I’m holding a lot of assets in mainland China, my concern would be that if the Chinese economy is facing a crisis, the government may impose restrictions that would make it very difficult for me to sell my assets, or even potentially make it impossible for me to repatriate my investments.”

Beijing will not relinquish control over China’s money

Paul Hodges, the founder of New Normal Consulting and a veteran of the global chemical industry, told The China Project that it is very unlikely that China will agree to dismantle its capital controls, which make it difficult, or impossible, to take money out of China on a regular basis.

“Of course, one-off trading activities can take place in yuan, and a company can use yuan to pay wages and other costs in China. But the yuan is not a fully convertible currency,” said Hodges. In his view, China is not yet in an economic position to truly internationalize the yuan and lacks the political will to do so.

“China has vast debts — currently 295% of GDP — and it is dealing with the after-effects of a major real estate bubble. Property prices are far higher than in New York or London, in terms of local people’s income. So China cannot risk capital flight caused by a rush to take money abroad.”

Hodges continued: “China also needs to maintain its flexibility to set domestic interest rates and to manage the money supply. Plus, of course, it has a rapidly aging population, which is set to have an increasingly negative impact on its future growth prospects.”

Most countries continue to take a cautious view of the yuan. International Monetary Fund (IMF) figures show that less than 3% of global central banks’ reserves are held in yuan-denominated assets.

And while Americans have watched with concern as the dollar has been rocked by rising interest rates, a crisis at Silicon Valley Bank, and a looming debt ceiling, the greenback continues to hold its value.

As Robin Brooks, chief economist of the Institute for International Finance, tweeted in March, “The U.S. Dollar is more powerful than ever.”

Other economists emphasize that the dollar still dominates the debt market, and the amount of dollars held overseas has increased markedly in the past two decades.

The vast size of the U.S. economy and the breadth of its trading relationships make de-dollarization in international trade an unlikely prospect, no matter how enthusiastically China promotes the yuan.