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What Russia-Ukraine Conflicts Bode for Yuan Internationalization?

Jul 14-2022   



Western financial sanctions against Russia, such as excluding it from SWIFT and freezing USD350 billion of its foreign reserves, are bound to cut both ways, severely undermining Russia’s economic and foreign exchange stability while disrupting the existing international currency regime and the greenback’s position, noted Prof. Huang Zhuo, Assistant Dean of the NSD and Deputy Director of both PKU Institute of Digital Finance and PKU Institute of Computing and Digital Economy.

 

Meanwhile, the Chinese currency has been making headway in its international drive, evidenced by the popularity of e-CNY at the venues of the 2022 Beijing Winter Olympics and the IMF’s recent decision to adjust RMB’s weight, from 10.92% to 12.28%, in the SDR currency basket. Given such developments, Prof Huang, in a media commentary, seeks to answer how the Russia-Ukraine conflicts impact on the internationalization and digitization of the Chinese currency.

 

Since the end of the Second World War, the US has managed to put the greenback at the linchpin of the international currency regime and as such has gained certain abilities to wield its currency for strategic containment. However, the US dollar is confronted with a number of daunting challenges chiefly due to the declining proportion of American economy and trade in the world total, says Prof. Huang. Its dominant position has also greatly exerted negative externality on the stability of the global financial system through the Fed’s quantitative easing and subsequent exits. In addition, that the US abuses the dollar’s hegemony has backfired and significantly sapped its credit base.

 

The Chinese currency, on the other hand, has met with new strategic opportunities for three major reasons. The sheer size of China’s real economy and its fast-growing trade have solidified the fundamental demand for an internationalized yuan. Moreover, the geopolitical dynamics born out of the Russia-Ukraine conflicts will transform the international currency system and allow the Chinese currency to gain traction in its international drive. By freezing Russian foreign reserves, the US has undermined the absolute security of American treasure bonds and has caused some non-NATO countries to diversify their currency holdings. For example, the Israeli Central Bank has started to make renminbi part of its foreign reserves while lowering the ratio of US dollar and euro holdings. In addition, more wind is put in the sail of yuan internationalization thanks to technological advance in finance and the maturing of e-CNY.

 

Prof. Huang believes that for yuan to continue its international momentum, the utmost task is to ensure the stable growth of the Chinese economy and its international trade. The ordeal of Japanese yen proves the need for such fundamental undergirding. He also advises perfecting institutional arrangements, including a more market-based mechanism for foreign exchange rates, steady opening of RMB capital accounts, and provision of more RMB risk management tools on the market. As such a foundation is solidly laid, breakthroughs can be made in some key areas, such as leveraging e-CNY technology to solve bottlenecks in cross-border trade, promoting the use of yuan in regional trade pacts, facilitating pricing and settlement in yuan in global commodity trade, and increasing the significance and volume of renminbi in international financial institutions in which China has a fairly large say.

 

What Russia-Ukraine Conflicts Bode for Yuan Internationalization?

Jul 14-2022   



Western financial sanctions against Russia, such as excluding it from SWIFT and freezing USD350 billion of its foreign reserves, are bound to cut both ways, severely undermining Russia’s economic and foreign exchange stability while disrupting the existing international currency regime and the greenback’s position, noted Prof. Huang Zhuo, Assistant Dean of the NSD and Deputy Director of both PKU Institute of Digital Finance and PKU Institute of Computing and Digital Economy.

 

Meanwhile, the Chinese currency has been making headway in its international drive, evidenced by the popularity of e-CNY at the venues of the 2022 Beijing Winter Olympics and the IMF’s recent decision to adjust RMB’s weight, from 10.92% to 12.28%, in the SDR currency basket. Given such developments, Prof Huang, in a media commentary, seeks to answer how the Russia-Ukraine conflicts impact on the internationalization and digitization of the Chinese currency.

 

Since the end of the Second World War, the US has managed to put the greenback at the linchpin of the international currency regime and as such has gained certain abilities to wield its currency for strategic containment. However, the US dollar is confronted with a number of daunting challenges chiefly due to the declining proportion of American economy and trade in the world total, says Prof. Huang. Its dominant position has also greatly exerted negative externality on the stability of the global financial system through the Fed’s quantitative easing and subsequent exits. In addition, that the US abuses the dollar’s hegemony has backfired and significantly sapped its credit base.

 

The Chinese currency, on the other hand, has met with new strategic opportunities for three major reasons. The sheer size of China’s real economy and its fast-growing trade have solidified the fundamental demand for an internationalized yuan. Moreover, the geopolitical dynamics born out of the Russia-Ukraine conflicts will transform the international currency system and allow the Chinese currency to gain traction in its international drive. By freezing Russian foreign reserves, the US has undermined the absolute security of American treasure bonds and has caused some non-NATO countries to diversify their currency holdings. For example, the Israeli Central Bank has started to make renminbi part of its foreign reserves while lowering the ratio of US dollar and euro holdings. In addition, more wind is put in the sail of yuan internationalization thanks to technological advance in finance and the maturing of e-CNY.

 

Prof. Huang believes that for yuan to continue its international momentum, the utmost task is to ensure the stable growth of the Chinese economy and its international trade. The ordeal of Japanese yen proves the need for such fundamental undergirding. He also advises perfecting institutional arrangements, including a more market-based mechanism for foreign exchange rates, steady opening of RMB capital accounts, and provision of more RMB risk management tools on the market. As such a foundation is solidly laid, breakthroughs can be made in some key areas, such as leveraging e-CNY technology to solve bottlenecks in cross-border trade, promoting the use of yuan in regional trade pacts, facilitating pricing and settlement in yuan in global commodity trade, and increasing the significance and volume of renminbi in international financial institutions in which China has a fairly large say.