NEWS ANALYSIS: China seizes on retreating dollar to push for global yuan

Shanghai/Singapore — As Chinese President Xi Jinping toured Southeast Asia this month to forge closer ties against higher US tariffs, the People’s Bank of China (PBOC) was seizing a moment of confusion and disruption in global trade to promote greater usage of the yuan.

It won’t dethrone the dollar, but as cross-border yuan payments surged to a record in March, analysts say there is renewed appetite for a global yuan as aggressive tariffs shake faith in the US currency and other US assets.

In April, PBOC-controlled financial services firm China UnionPay strengthened its payment network in Vietnam and Cambodia, while the central bank announced steps to promote cross-border yuan settlement and other financial services.

More specifically, the QR-code payments UnionPay was promoting in the Southeastern Asian countries should facilitate transactions for tourists and small businesses, reducing reliance on the dollar.

The UnionPay deals build a network that now extends to more than 30 countries outside China and represent one end of a push to expand the yuan’s reach as an international trading, spending and investment currency.

At the other end of the push are the PBOC’s offshore yuan standby currency swaps with other central banks that reached a record 4.3-trillion yuan ($591.2bn) by value in February, cross-border commodity trades settling in digital yuan and efforts to price everything from oil to gold in the Chinese currency.

The moves also highlight China’s desire for a financial architecture independent of the West — and US banks — at an inflection point for markets as US President Donald Trump spurns his own trading partners and drives a scramble to reroute trade.

“The US weaponising tariffs has cast doubt over US asset safety, undercut trust in the dollar, and shaken the greenback’s global status,” E Yongjian, vice-general manager of Bank of Communications’ research department told a seminar on yuan internationalisation.

“That has made yuan assets more attractive, and will help broaden cross-border use of the Chinese currency.”

China’s central bank announced steps this month to beef up cross-border financial services in Shanghai and encouraged companies to prioritise yuan usage in payment and settlement.

The PBOC also pledged to strengthen its homegrown cross-border yuan payment system CIPS, and push forward with the application of blockchain — the technology on which digital yuan is based.

Chinese companies which are stepping up overseas investment are demanding better financial systems as “unilateralism, protectionism ... and higher tariffs impact the global supply chain,” PBOC vic- governor Lu Lei said earlier this month.

‘Good opportunity’

China has long harboured ambitions for the yuan to be a global currency, similar to the euro or dollar and reflective of the importance of the world’s second-biggest economy.

But progress has always been hampered by unwillingness to open the capital account, which limits the usefulness of owning the yuan if it can’t be freely moved out of China and around the world.

There’s no sign of that changing, but progress on other fronts, where it has gained in places such as Russia and other trading partners, stands to accelerate.

In his first 100 days in office Trump has erected the highest tariff walls around the US economy in more than a century and upended parts of the world order that Washington helped build, raising the prospect of recession.

China though has sought to shore up trade with other countries.

“If the US enters recession, and China gains the upper hand in this round of Sino-US rivalry — a scenario dubbed ‘east rising and west declining’ — that's indeed good for the yuan over the long term,” Qu Fengjie, a researcher at the National Development and Reform Commission (NDRC), China’s top planning agency, told a recent seminar.

“China can break the old order of the international monetary system.”

To be sure, no currency can yet come close to challenging the dollar, which comprises nearly half of global payments, according to Swift, and more than 80% of trade financing.

The yuan has risen to fourth in global payments, but it is a distant ranking, comprising 4%, and some say distrust in the dollar is likely to drive up usage of other currencies, in particular the euro, well before the yuan.

“The yuan has been weak for many years, so there’s no clear upside” to hold the Chinese currency for investors or central banks, said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis.

Still, she sees China’s deepening ties with other emerging markets and Global South countries as likely to drive yuan use and there are signs of demand.

In April, Argentina renewed a $5bn portion of a yuan swap line and Pakistan is lobbying to expand its yuan swap line. Bilateral currency swaps can facilitate trade and investment and are a useful addition to the global financial safety net, PBOC governor Pan Gongsheng said last year.

“The US-dominated global monetary system is getting more and more fragile,” said Tu Yonghong, finance professor of Renmin University of China. China should “grasp this good opportunity”.

“This will boost use of the yuan, given the size of China’s trade with other countries.”

Reuters