May 10, 2023
HONG KONG – The US dollar’s supremacy has been increasingly questioned since the 2007-2008 global financial crisis. More recently, in March 2023, Silicon Valley Bank, which was one of the top 20 banks in the US with over $215 billion in assets, collapsed. The bank suffered a massive loss of $1.8 billion due to the interest hikes on US Treasury securities. Days later, New York-based Signature Bank, with over $110 billion in assets, also collapsed.
Silicon Valley Bank invested a large proportion of its deposits in Treasury notes and other quasi-sovereign securities. As the US Federal Reserve raised interest rates sharply, the value of those securities fell, which was worsened by the current weaker situation of the US dollar.
Also recently, during the 2023 World Economic Forum in Davos, Saudi Arabia’s finance minister, Mohammed Al-Jadaan, said the kingdom is open to trading in currencies other than the US dollar, after a 48-year relationship solely with the US dollar. The statement followed Chinese President Xi Jinping’s urging of the Gulf monarchs to accept yuan for oil, and Riyadh officials saying last March the country would consider accepting the Chinese currency. This has been seen as a move toward de-dollarization, which means reducing the dollar’s dominance in global markets.
The Saudi Arabian finance minister’s statements were indeed interpreted by some as another step toward de-dollarization. What role can the digital yuan play in this, if any?
The BRI is currently a key program for China, and consequently, it is perfectly possible to imagine how important the expansion of the digital yuan can become for China within the Belt and Road countries
There were high hopes for the renminbi´s internationalization in the early 2010s, but results to date have been mixed and even slightly disappointing.
The renminbi is among the top-five most-used currencies in global payments, according to financial messaging services provider the Society for Worldwide Interbank Financial Telecommunication (SWIFT), up from 35th position in October 2010. The renminbi rose to a high 3.2 percent of international payment settlements in January 2022, eclipsing the mark it set in 2015.
If we analyze these numbers, we can see that the renminbi has a long way to go before it can challenge the US dollar. According to SWIFT, in October the greenback was the top currency used in global payments with a 42.1 percent market share, followed by the euro (34.4 percent), the British pound (7.85 percent), and the Japanese yen (2.96 percent) with the renminbi at 2.44 percent, its lowest ratio in a year.
The same factors hindering internationalization of the physical renminbi nowadays – capital and foreign exchange controls – also apply to China’s central bank digital currency (CBDC), the digital yuan; and just as the physical renminbi has specific cross-border applications, so does the digital yuan, regardless of those hindering factors. The digital yuan may consequently be able to boost global wholesale use of the renminbi.
China´s digital yuan is a CBDC, a new form of central bank money accessible to the public and accepted as a means of payment, legal tender, and safe store of value by all individuals, businesses and government agencies. The major economy leading the CBDC race in Asia (and the rest of the world) is China.
Even though China’s digital yuan will be beneficial in many different ways, one of the areas where it can bring more value is in promoting the use of the yuan for cross-border payments; some of the US dollar-denominated international trade transactions can be converted into renminbi-denominated ones, thus reducing the dominance of the US dollar in international trade and finance.
This will not happen overnight, but if there is enough penetration and acceptance of the digital renminbi in a separate jurisdiction or region, it is conceivable that a trade and finance system parallel to the US dollar system can gain critical mass, a system that can allow certain countries to bypass the global banking system and US sanctions.
To me, the Belt and Road Initiative (BRI) area is the best possible candidate area for China to start internationalizing its digital yuan, alongside the Regional Comprehensive Economic Partnership (RCEP).
The BRI is currently a key program for China, and consequently, it is perfectly possible to imagine how important the expansion of the digital yuan can become for China within the Belt and Road countries.
Through the RCEP, China will strengthen its trade ties with neighboring countries, and will also be able to leverage agreement to facilitate cross-border adoption of its digital yuan to benefit consumers, dealers, bankers and industries across regions.
Focusing on Hong Kong, the special administrative region can play a key role in helping the yuan to internationalize, given its competitive advantages as the world’s largest offshore renminbi center and its “one country, two systems” principle, the cornerstone of the city’s capitalist system. In this sense, renminbi deposits in Hong Kong exceed 800 billion yuan ($115.7 billion). According to SWIFT, more than 70 percent of global offshore renminbi payments are processed in Hong Kong.
In addition, China’s growing influence in the Middle East and North Africa region can create an ideal platform for China to internationalize the renminbi. China, which for years played only a secondary role in the region, has suddenly transformed itself into the new power player, as we recently saw with the agreement negotiated in Beijing to restore relations between Saudi Arabia and Iran.
To sum up, the digital yuan may be able to boost global wholesale use of the renminbi, and the BRI can provide the perfect platform to do so. While facilitating cross-border adoption of the digital yuan, such economic exchanges will also help any of the other central bank digital currencies in Asia. Moreover, Hong Kong can play a key role in helping the yuan to internationalize, given its role as the world’s largest offshore renminbi center.
The author is a fintech adviser, researcher and a former business analyst for a Hong Kong publicly listed company.
The views do not necessarily reflect those of China Daily.