A Reality Check for the Renminbi
While China has made great strides in internationalizing its currency, the goal of dethroning the US dollar is still far off. To undermine the dollar’s dominance in cross-border trade, China must loosen capital controls and make the renminbi more attractive to international investors.
NEW YORK – After years of speculation and false starts, it seems that the internationalization of the renminbi is well underway. On March 29, China and Brazil announced plans to trade using their own currencies, rather than the US dollar. The day before, the China National Offshore Oil Corporation and France’s TotalEnergies completed their first-ever renminbi-denominated liquefied natural gas trade. Russian President Vladimir Putin recently said that he wants to use the Chinese currency not just for trading with China but also as a form of payment in trade with other countries in Asia, Africa, and Latin America. And Saudi Arabia has been in talks with China since last year about accepting payments for some oil exports in renminbi.
It is no secret that China would like to convert the renminbi into an international currency and move away from the global dominance of the US dollar. While this is often interpreted as a geopolitical move, a way to insulate China from possible US-led economic sanctions in the future, transforming the renminbi into one of the world’s leading settlement currencies would also greatly benefit the Chinese economy. Moreover, it would help protect the country from an exchange-rate crisis, which is why other countries, including India and ASEAN countries, are trying to internationalize their currencies, too.
The figure below, based on ongoing research by my co-authors and me, illustrates the progress that China has made in its efforts to internationalize the renminbi. The red line traces South Korean firms’ renminbi-denominated exports as a share of its total exports to China between 2006 and 2020, showing the Chinese currency’s share rising from 0% before 2008 to nearly 6% by 2020. In October 2016, the renminbi became part of the basket of currencies underpinning the International Monetary Fund’s reserve asset, special drawing rights, joining an exclusive club alongside the dollar, the euro, the yen, and the British pound.