Our currency, but not your problem

China and France have completed their first yuan-settled liquefied natural gas trade through the Shanghai Petroleum and Natural Gas Exchange, according to an announcement issued by the exchange last Tuesday.

The trade between China National Offshore Oil Corp. and France’s TotalEnergies involved approximately 65,000 metric tons of liquefied natural gas from the United Arab Emirates without using the U.S. dollar for settlement.

A single transaction between two companies may not be a big deal. But it signals that the yuan is gaining traction in its quest to become a more international currency.

The People’s Bank of China (PBOC), the country’s central bank, signed a memorandum of understanding with its Brazilian counterpart on setting up yuan clearing arrangements in Brazil, according to a PBOC statement issued Feb. 7. The deal will enable the two countries to carry out trade and financial transactions directly, exchanging yuan for reais — or vice versa — rather than converting their currencies to the U.S. dollar first.

The establishment of yuan settlement arrangements will be beneficial to cross-border transactions, and further promote bilateral trade and investment, the statement said. Two-way trade between China and Brazil reached US$172 billion in 2022, according to Chinese Customs data. China became the South American country’s largest trading partner a decade ago.

In recent months, China has signed similar yuan clearing deals with Pakistan, Kazakhstan and Laos.

China and Russia have started using the yuan and ruble to make settlements for their bilateral trade, while Saudi Arabia is considering using the yuan for its oil trade with China. And Egypt has decided to issue yuan-denominated bonds, also known as panda bonds.

The rising use of the yuan in international trade and global reserves is a natural outcome of China’s growing economic and trade interactions with the rest of the world. The U.S. weaponizing the dollar in the Ukraine conflict has also accelerated the dedollarization process. Although Russia is leading the dedollarization drive to cushion the impact of financial sanctions, some other countries have also intensified efforts to reduce the dependence on the dollar.

Since the establishment of the Bretton Woods system in 1944, the U.S. dollar has been the global reserve currency. Even when the United States terminated the dollar’s convertibility to gold in 1971, effectively bringing the Bretton Woods system to an end, the dollar’s global hegemony continued as the oil dollar system came into being in the 1970s.

Many experts have pointed out that by taking advantage of the dollar’s status as the major international reserve currency, the United States is virtually collecting seigniorage —the difference between the value of money and the cost to produce and distribute it — from other countries. The dominance of the dollar endows the United States “exorbitant privilege,” including increased access to capital, lower borrowing costs, and greater economic and political influence, but causes troubles to the world economy from time to time.

For example, the back-to-back interest rate hikes by the Fed to tame hyperinflation since March 2022 have led to many countries experiencing significant currency depreciation, capital outflows and falling asset prices.

With the United States ganging up with allies to decouple from China, particularly technologically, the yuan’s internationalization efforts will only speed up while the dollar’s monopoly will be dented. China has been reducing its holdings of U.S. debt, including U.S. Treasury bonds, bills and notes, in recent years. According to U.S. Treasury Department data, China’s holdings of U.S. debt peaked in November 2013 at US$1.317 trillion and have since declined to US$859.4 billion at the end of January 2023.

More countries are expected to make alternative currency settlement arrangements to reduce their dependence on the dollar, as this can cut transaction costs and make settlements more efficient. The central banks of many countries have also been reportedly reducing U.S. debt holdings while adding gold to their stockpiles.

“The dollar is our currency, but your problem.” This infamous, shocking line from then U.S. Treasury Secretary John Connally at a G-10 meeting in Rome in 1971 remains relevant today. Although a slow process, a pivot away from the dollar-centric monetary system will come in tandem with a more multipolar world.

There is much room for the yuan to be used internationally. As of the end of the third quarter of 2022, the yuan’s share of international reserves was just about 2.75%, and according to financial messaging services provider SWIFT, yuan payments accounted for 2.19% of global payments by value in February 2023. Such proportions do not reflect China’s economic and trade power, with its GDP accounting for about 18% of the world total and foreign trade amounts leading the world at 13.8% as of 2021.

The yuan can’t become a full-fledged reserve currency anytime soon because of the cross-border capital restrictions in China. But the yuan’s internationalization is unstoppable.

(The author is a deputy editor-in-chief of Shenzhen Daily.)