Yuan-ization’ of the World is Under Full Steam Now

Sofia Pale, PhD, Research Fellow of the Center for South-East Asia, Australia and Oceania of the Institute of Oriental Studies of the Russian Academy of Sciences, exclusively for the online magazine – “New Eastern Outlook.” 

Column: Economics

Region: Eastern Asia

Country: China

On October 1, 2016, China’s yuan has been officially accepted in the list of the IMF’s (International Monetary Fund) reserve currency with a share of 10.93%, taking third place after the US dollar (41.73%) and the Euro (30.93%). This means that all central banks around the world are now required to keep a portion of their reserves in yuan, thus strengthening China’s positions.

The rise of the yuan to the very top of the international economic system has been so breathtakingly rapid that experts are now talking about the imminent onset of the era of the bipolar “yuan-dollar” system, predicting the yuan to occupy second place in the basket of global currencies within the next three years against the backdrop of the weakening Euro and pound. It’s even more curious that in the next ten years, the yuan can be big enough to occupy first place.

There’s really no reason why the yuan wouldn’t be able to achieve this position. Back in 2008, Beijing began providing loans directly in yuan, instead of resorting to traditional US dollar loans. First, a number of peripheral states like Fiji and Oceania, got hooked by the yuan “credit needle”, then they were followed by a number of African countries. Next, this scheme was adopted in China’s relations with Latin America, where Beijing began playing on the big scale, taking serious steps toward bringing the yuan with it in its relations with European and Eurasian countries, including Russia.

In 2013, the People’s Bank of China and the European Central Bank signed the largest deal in the history of China on 45 billion Euro currency swap. By the way, similar agreements have already been concluded between China and its immediate neighbors in the Asia-Pacific region – Japan, South Korea, New Zealand, Malaysia, Mongolia and others.

In 2014, the yuan for the first time began being traded on the London Stock Exchange, and a year later, yuan offshore centers were created in Switzerland, France, Germany, Luxembourg and the Czech Republic. Central banks in most European states as well as in Russia are now holding the yuan in their portfolios, while China has been providing generous loans to Greece, Portugal, Spain and Ukraine during their the financial crises they encountered.

The true breakthrough for the yuan begun in 2015, when in just a few months China surrounded its neighboring states with the “yuan ring”, squeezing out US dollars from local markets. At the same time, China has become a major US creditor, investing 1.261 trillion dollars in the US economy, which amounts to four times Russia’s annual budget. Moreover, China now occupies the first position in terms of gold reserves on the planet. All this contributed to a significant strengthening of the yuan on a global scale.

However, the most ambitious project initiated by Beijing so far to undermine the positions occupied by the US dollar as a global currency, was the notorious “one belt one road” initiative. This transport route of unprecedented scale will lead to a significant acceleration of economic interchanges, which will result in the reduction of the costs of shipping of Chinese goods to Europe via land routes. For this project to succeed, Beijing has established a 40 billion dollar fund for the Silk Road, along with 100 billion dollars for the Asian Infrastructure Investment Bank (AIIB), which opened its doors in the summer of 2015. At the same time, the Chinese state has significantly reduced the IMF’s influence on developing countries.

At the same time, analysts have started perceiving the AIIB, created with the support of the EU, as a potential threat to US dominance and the positions occupied by its allies. After all, the total amount of resources invested the Silk Road Fund and the AIIB is comparable to the funds run by the Asian Development Bank’s capital (acting on behalf of Japan); and they constitute just a margin smaller than that those funds that are at the disposal of the World Bank. China’s investments in the world are only two and a half times lower than the money that the IMF has at its disposal. This starts to make sense if you are to remember that the World Bank’s and IMF’s policies are defined by Washington. Among the founders of AIIB one cannot find the United States or Japan; while a number of traditional US allies that are located on the “one road” have agreed to participate in the AIIB project, such as Australia, South Korea, Israel and the UK.

In 2016, a quarter of the world trade deals was paid for in yuans. In particular, one can mention the steadily growing number of deals paid with yuans in Europe, that undermine the role played by the Euro and the US dollar. According to various experts, in 2017 the yuan can become a freely convertible currency, which will mark a major advancement of this currency.

Political developments also favor the growing importance of the yuan in the world. The BRICS countries (Brazil, Russia, India, China, South Africa) have decided to turn their backs on the US dollar, which resulted in the BRICS Development Bank issuing its first bonds in yuan, with a total worth of roughly 400 million dollars. It’s been announced that by the end of the year the bank will issue several packages denominated in the currencies of the member countries of BRICS for a total worth reaching 1 billion dollars.

Additionally, the EAEC countries (Russia, Kazakhstan, Belarus, Armenia, Kyrgyzstan) have also imposed restrictions on the use of US dollars within their respective territories. This, of course, will reduce the demand for US currency, and the vacated niche may be soon be occupied by the yuan.

Of course, there are many reservations regarding the future of the yuan. China’s economic growth is slowing, while its inflation remains at a high rate. Domestic debts lead to talk about a possible banking crisis, while the devaluation of the yuan in the summer of 2016 forced investors into reducing the volume of investments in the Chinese economy by 5-6%. Nevertheless, the yuan has occupied such heights in the global financial system that it is safe to assume that the Chinese currency can only expect some corrections before taking a leading position within the global financial market.

http://journal-neo.org/2016/11/26/yuan-ization-of-the-world-is-under-full-steam-now/
http://journal-neo.org/2016/11/26/yuan-ization-of-the-world-is-under-full-steam-now/