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Will China Succeed in Internationalizing Its Currency?

Updated on February 8, 2020
Green currency in a dominant position until now, but China may succeed in expanding the deal with the "Renminbi" (AFP)
Green currency in a dominant position until now, but China may succeed in expanding the deal with the "Renminbi" (AFP)

For several years, China has been pursuing a separate currency to ensure its economic sovereignty. After the global financial crisis in 2008, the People's Bank of China signed bilateral currency exchange agreements (“Swap” agreements) with the European Central Bank, and with central banks in emerging countries such as Thailand, Nigeria, or Argentina, aimed at promoting diversification of international currency reserves, and the use of the Chinese currency on International domain. The adoption of the Renminbi internationalization strategy accelerated in the fall of 2013, with the establishment of the Shanghai Free Trade Area, which allows the free exchange of Chinese yuan and its use in trade exchanges, an initiative aimed at increasing its weight in the global monetary system. In October 2016, the yuan was recognized as the fifth global reserve currency. But a study issued on October 15 in the "Financial Times", based on the figures mentioned in the latest investigation by the Bank for International Settlements, indicated that 88% of the international exchanges are priced in dollars, while the share of the "RMB" did not exceed 4%. According to the International Monetary Fund, the latter represents only 2% of foreign exchange reserves.

This partial success is due, according to Jean-Raphael Charbonnier, an economist and researcher at the "Center of Asia", to the macroeconomic context of China, which prevailed for several years, and for a political reason as well. He argues, “It should be remembered that the United States has an open market, a strong currency, and a deficit in the economic balance. The balance of trade controls the supply and demand for foreign currencies, but the problem for China was its trade surplus, which, until 2008, represented 10% of its GDP. Although the decline in China's trade balance of operations to 1% brings it out of the net source position, this development has had only a limited impact on the Renminbi market. The American-Chinese trade tensions have halted the growth of that market, according to Charbonnay, who believes that «the Rimmenbay is of course linked to supply and demand, but it is already subject to the political factor. To obtain recognition of a new currency as a method of payment, its exchange rate must not be subject to fraud. Therefore, the most prominent players in the market assert that the strategy of the internationalization of the "Renminbi" will be effective only if the Chinese authorities stop controlling exchanges in this currency. According to the economist, and apart from the Chinese decision to seek to internationalize the “Yemeni” and the pricing that accompanied 2016 since more than 25% of Chinese trade in yuan, this strategy has shown its limits, because the Chinese are lending in dollars and borrowing this currency in the international market. "The Silk Road Economic and Strategic Project, which aims to link Europe, Asia, Africa and Australia, is funded in dollars first by the Exim Bank, Bank of China and China Development Bank, all of which contributed mainly to the investment and development projects included in this project," Charbonnier notes.

The green currency has been in a dominant position so far, but China may succeed in expanding trading with the "Renminbi" in the near future. In the short term, if US President Donald Trump succeeds in winning a second presidency, and the United States continues to use the dollar as a strategic weapon to defend its interests in the world, then we can, in the opinion of Jean Raphael Charbonnier, “think more seriously about the hypothesis of the dollar’s ​​decline because A political or geopolitical crisis erodes confidence in it as a currency. ” In the long run, experts estimate that two factors may lead to the end of the dollar's domination that has persisted since the end of World War II. On the one hand, the global needs for liquidity are increasing rapidly with increasing trade and international financial relations, especially in emerging Asia and Europe. On the other hand, the declining weight of the American economy will gradually lead to a re-balancing of the global monetary system based on several currencies.


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