Comment on “International Finance and Geopolitics”

The Chinese Yuan (RMB) has emerged as a potentially serious challenger to the US Dollar as a reserve currency in the international monetary system. Although the status of the RMB as an international currency currently is much lower on every measure than the $US, the recent upward trend in the cross-border and offshore usage of the RMB is remarkable. Eichengreen (2024) presents two scenarios going forward: First, the status-quo scenario. The US and China continue to trade, despite high tariffs, high tech exports control, and other measures, with China maintaining retaliatory tariffs and other actions. The second scenario is that economic and financial ties are ruptured. This scenario may occur when the US determines China is aiding Russia militarily or when China invades Taiwan.

I have three comments: First, why China is pursuing RMB internationalization, and since when; second, whether there may be a third scenario between the status quo and rupture; and third, the Russian invasion and the western sanctions on Russia may turn out to be a turning point to accelerate RMB internationalization.

First, I would date the starting point in the process of the RMB internationalization at the 2008–2009 global financial crisis. China carefully observed collapses of large financial institutions in the United States and in Europe. The Federal Reserve had to provide $US liquidity quickly to the rest of the world using central bank bilateral swaps. China must have concluded that the US financial system was not a model to follow and having the $US as the sole international reserve currency was dangerous for China and the rest of the world.

In 2009, then Governor of the People's Bank of China (PBOC), Xiaochuan Zhou, wrote an essay entitled “Reform the international monetary system” (Zhou, 2009), in which he argued that when a national currency plays the role of an international reserve currency, domestic considerations and constraints at times make it difficult to provide liquidity to the international monetary system when needed. He went on to propose establishing a super-sovereign reserve currency. Alternatively, he proposed expanding the role of the International Monetary Fund's (IMF's) Special Drawing Rights (SDR) to include payment and settlement of international trade and finance. He also added that “[T]he basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight.” This was a thinly veiled demand to include the RMB in the SDR composition, which was realized 7 years later, in 2016.

In the spring of 2009, the PBOC signed bilateral swap arrangements with Hong Kong, Malaysia, Indonesia, Argentina, and Korea. At the time, this looked like a response to the 2008 crisis, very much in parallel with, if not imitating, the Federal Reserve extending bilateral swaps to many advanced countries, as an expansion of the traditional G10 framework, and four emerging market economies, Korea, Singapore, Mexico, and Brazil. However, the RMB was not an international currency then and the use of the RMB during a hard currency liquidity shortage in emerging market economies would be limited. At the time, China explained the purpose of the bilateral swaps as being trade enhancing measures, not crisis liquidity lending. Since then, the PBOC eagerly extended the number of swap agreements. By end-2021, the PBOC had signed swap agreements with 40 countries and regions.

Other notable developments include establishing the Cross-Border-Interbank-Payment System (CIPS) in 2015, having the RMB included in the SDR composition in 2016, and starting a pilot program on central bank digital currency (e-CNY) in 2019. The significance and limitations of CIPS are extensively discussed in Eichengreen (2024).

Second, there may be a third scenario, namely, the use of the RMB expands quickly and forms a RMB bloc without a rupture. China will succeed in having a region in which the RMB is used in invoicing, and settlement, and as a store of value, a foreign exchange reserve currency, and for intervention. In this scenario, China is not aiming at upsetting the dollar dominance in the international financial market but forming a RMB bloc where nations friendly to China—such as those participating actively in the Belt and Road Initiatives—will use the RMB as an international currency.

Third, the Russian invasion of Ukraine started on February 24, 2022, followed by the west's sanctions on Russia, has become an accelerator of the use of the RMB. It pushed Russia into China's sphere of influence, in using the RMB and led to a stronger trade relationship with China. Moreover, those countries that worry about possible sanctions from the west in the future may be interested in a precautionary move to diversify their foreign reserves out of US dollars and increase their RMB assets. China and Saudi Arabia agreed to a shift to the RMB as the transaction currency for oil exports from Saudi Arabia to China. Commodities are traditionally denominated in $US, and this is a first instance of China chipping away at that dominance.