Recent news highlights a significant milestone in China’s economic strategy: the use of the renminbi (RMB) in international transactions has surged to record highs. In July 2023, over 53% of China’s cross-border transactions were conducted using the Chinese currency, up from just 40% in July 2021, according to the State Administration of Foreign Exchange. This growth is a direct result of China’s strategic partnerships, economic alliances, and ongoing efforts to promote the renminbi as a global currency. While the renminbi remains a distant second to the U.S. dollar in global trade, China’s long-term strategy is becoming increasingly clear: reduce dependency on the dollar and increase the renminbi’s role in global finance. Although this shift is happening gradually, the potential for significant economic implications for the United States and the global economy cannot be underestimated.
Remember that the massive amount of extra U.S. dollars in the oil markets and in trade in general form a buffer for the dollar and offer inertia against inflation. When the U.S. government does something stupid (as the Biden Administration has done) and inflation is triggered, the inflation “tax” is borne not only by U.S. citizens, but shared with anyone who is holding dollars. This is a massive advantage for the U.S.
A Boost from Sanctions and Strategic Alliances
The recent increase in the renminbi’s use is partly due to China’s closer economic ties with Russia. Following Russia’s invasion of Ukraine and subsequent U.S. sanctions, Russia found itself limited in its ability to use the dollar for international transactions. As a result, Russia began to rely more heavily on the renminbi. In February 2023, Elvira Nabiullina, the governor of Russia’s central bank, noted that the use of the Chinese currency for settlements, financial transactions, and deposits had “surged.” This shift highlights a broader trend: countries targeted by U.S. sanctions are increasingly turning to the renminbi as an alternative to the dollar.
In addition to Russia, China has been expanding its economic reach by opening or renewing currency swap lines with countries like Saudi Arabia, Argentina, and Mongolia—nations rich in commodities that China needs. These swap lines allow countries to trade directly in their local currencies, bypassing the need for the dollar. China has also established new renminbi clearing banks in countries such as Brazil, Pakistan, and Kazakhstan, facilitating the use of the renminbi in these regions. These efforts reflect Beijing’s broader strategy to internationalize its currency and reduce its dependence on the U.S. dollar.
The Importance of a Stable Renminbi
A key part of China’s strategy to increase the use of the renminbi in global trade is maintaining its stability. A stable renminbi encourages other countries to use it for trade, as they can trust that its value won’t fluctuate wildly. According to Louis-Vincent Gave of Gavekal, a financial services firm, “You can’t go to Indonesia, Thailand, South Korea and say, ‘Hey, let’s trade in renminbi rather than dollar’ if you have a weak currency. For that to happen, you need to have a stable currency.” This need for stability is why China has kept its exchange rate with the U.S. dollar relatively stable, despite selling pressure on the yuan.
This strategy marks a significant shift from China’s past policies. In 2015, to combat an economic slowdown, China devalued its currency, making its exports cheaper but reducing the renminbi’s use for international trade settlements. The devaluation led to a significant decline in the global use of the renminbi, a setback from which China has only recently recovered. By keeping the renminbi stable, China is sending a clear message that it is committed to promoting its currency on the global stage.
But this is part of the problem, the renminbi is not a floating currency, it is worth what the Chinese Communist Party says it is worth, and they can manipulate it at will. Every country knows that if China can use this to its advantage it will, and it will quickly become a weapon of war when that becomes convenient. The dollar is backed by America and its Constitution, and has the trust of the international markets, at least for now.
Global Challenges and Strategic Goals
Despite these advancements, the renminbi still lags far behind the U.S. dollar in global finance. According to data from the international payments network SWIFT, the renminbi makes up only about 4.74% of global payments, far behind the dollar, euro, and British pound. One of the major barriers to the renminbi’s wider use is China’s capital controls. Unlike the U.S., which allows free movement of capital, China imposes strict controls to prevent large amounts of money from leaving the country. These controls make it difficult for foreign investors to move money in and out of China, limiting the renminbi’s appeal as a global currency.
Furthermore, most foreign exchange traders still prefer to use the dollar, given its long-standing dominance and the extensive infrastructure built around it. “From our client base, we have seen increasing activity in [renminbi] as a payment,” said Wee Khoon Chong, a senior markets strategist at BNY in Hong Kong. “But its use had not reached a critical turning point where it would displace a major currency. It’s a slow grind.”
Chinese leaders, including President Xi Jinping, are fully aware of these challenges. Xi has consistently called for a strong renminbi, not necessarily to replace the dollar but to ensure China is not vulnerable to economic coercion. As Edwin Lai, a professor specializing in renminbi internationalization at the Hong Kong University of Science and Technology, put it, Chinese officials “don’t want to be at the mercy” of the U.S. dollar.
The Implications for the U.S. and the Global Economy
The dominance of the U.S. dollar in global finance gives the United States significant economic advantages. It allows the U.S. to borrow money at lower interest rates and to run trade deficits without immediate negative consequences. The dollar’s role as the world’s primary reserve currency also gives the U.S. substantial geopolitical influence, enabling it to impose sanctions that can cripple economies. A significant shift away from the dollar would weaken these advantages, potentially leading to higher borrowing costs and a diminished ability to influence global events.
While a rapid shift away from the dollar is unlikely, the gradual rise of the renminbi and other currencies reflects broader trends in the global economy. As countries seek to diversify their reserves and reduce their reliance on the dollar, a slow movement toward de-dollarization could gain momentum. “China is not seeking to topple the dollar’s global dominance,” said Daniel McDowell, a professor at Syracuse University and senior fellow at the Atlantic Council. “China’s motives here are primarily about autonomy and resilience.”
China’s efforts to promote the renminbi as an international currency are reshaping the global financial landscape. While the renminbi still has a long way to go before it can rival the dollar’s dominance, the progress made so far is significant. As China continues to expand its economic influence and strengthen its financial systems, the renminbi’s role in global trade and finance is likely to grow. This trend not only has implications for the future of the U.S. dollar but also for the balance of power in international relations.
The rise of the renminbi is a clear signal that the international monetary system is evolving. As China pursues its goal of reducing dependency on the dollar, the world may be witnessing the beginning of a slow but steady shift in the global economic order. For now, the dollar remains king, but the renminbi’s growing presence is a reminder that nothing in global finance is set in stone.