The Chinese government has ramped up yuan internationalization through loans agreed upon through its Belt and Road Initiative, having already boosted the yuan’s share of global payments to record levels. In September, the yuan made up 3.71% of total global payments, according to data from the Society for Worldwide Interbank Financial Telecommunications (SWIFT). This is the highest such figure in history. The yuan has overtaken the euro to become the fifth most active currency for international payments by value, after the dollar, the British pound, the Japanese yen, and the Canadian dollar. But it remains far behind the dollar, which holds a 46.6% share of all payments.
During the Belt and Road Forum that ended on Wednesday, China’s policy banks signed a series of yuan-denominated loan contracts with foreign lenders. Many 130 countries that attended the forum belonged to the Global South, while most Western nations stayed away. And the presence of Russia’s President Vladimir Putin lent credence to Chinese President Xi Jinping’s ambition for a new, multipolar world order.
China’s policy banks seek to expand lending to commodity-rich countries in Latin America, a group of countries that has been a significant source of raw materials for the economy of China and other emerging markets. For example, the Export-Import Bank of China is discussing setting up a fund to provide $1 billion worth of yuan loans for infrastructure projects in these countries. The people familiar with the matter said that the money would be used to replace loans in U.S. dollars.
Other moves also point to the PBoC’s efforts to further internationalize the yuan, including pushing for more cross-border investments in its companies by offering a way for overseas investors to buy its shares with yuans instead of dollars. In June, the PBoC announced that Hong Kong-listed firms could accept yuan instead of Hong Kong dollars in their offshore equities trading through a dual counter model.
But yuan internationalization has risks. It raises the risk of capital flows that can destabilize domestic financial systems and even lead to a financial crisis, a phenomenon known as the “original sin” in academic circles. To minimize this risk, China should retain tight capital controls and only gradually open its banking system to foreign investment as it becomes more mature.
In the short term, more yuan presence abroad will help boost its status as a world reserve currency and reduce its vulnerability to capital flight. However, the PBoC should be cautious about pushing for more rapid progress toward full convertibility and let market forces determine the pace of yuan internationalization. The yuan should be treated as a complement to the dollar rather than a competitor. Otherwise, a race to currency dominance is likely to backfire. Laurie Chen is a China correspondent for Reuters in Beijing. She has reported on politics and general news from China for over six years. She previously worked at Agence France-Presse and the South China Morning Post in Hong Kong.