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The renminbi’s creeping internationalisation (III) – Salami-slicing

chi lo
By CHI LO 14.04.2023

In this article:

    Greater use of the renminbi has taken a notable step forward, with recent announcements by Brazil, Saudi Arabia, France and ASEAN[1] countries favouring the Chinese currency over the US dollar, or at least signalling a readiness to move away from the greenback as the preeminent currency in global trade.  

    The expanding use of the renminbi could boost China’s effort to make it a global currency. Its ‘salami-slicing tactics’ for internationalising the currency will likely slowly erode the dollar’s prominence in the medium term, but the Chinese currency is unlikely to replace the dollar completely.

    Countries may increasingly trade with China using the renminbi, but they will still use the dollar in trade with (most of) the rest of the world. Once renminbi use becomes more widespread, a payments system parallel to the US dollar system could gain critical mass, setting up the technical, regulatory and institutional frameworks to accommodate a more ubiquitous renminbi over time.

    What has happened?

    Further to China’s discussion with Saudi Arabia to trade oil in renminbi earlier this year[2], recent developments can be said to have boosted the pace of renminbi internationalisation: 

    • 27 March – Saudi Arabia’s Aramco will build oil refineries with China for RMB 83.7 billion (here)
    • 28 March – China and France completed their first liquefied natural gas (LNG) transaction using renminbi (here), involving 65 000 tonnes of LNG
    • 29 March – Saudi Arabia joined the China-led regional security and trade club, the Shanghai Cooperation Organisation (here), improving diplomatic relations and advancing talks on trading oil in renminbi
    • 29 March – China and Brazil struck a deal to ditch the US dollar and use the renminbi in cross-border transactions (here)
    • 30 March – ASEAN leaders considered reducing the usage of the US dollar, euro, pound sterling and Japanese yen in financial transactions and move to settlements in local currencies (here, or here)
    • 31 March – At the Boao Forum in Hainan in China, Malaysia revived its proposal to create an ‘Asian Monetary Fund’ to reduce dependence on the US dollar (here, or here). 

    Diversifying out of the US dollar

    These developments illustrate an appetite to diversify away from dollar risk, leave dollar-based payments system SWIFT and seek alternatives. Other such systems include: 

    • Russia’s System for Transfer of Financial Messages (SPFS) (2014)
    • China’s Cross-Border Inter-Bank Payments System (CIPS) (2015)
    • The EU European Payments Initiative (EPI) (2020)
    • China’s Multiple Central Bank Digital Currency Bridge Project (or m-CBDC Bridge) (2021), set up with the Hong Kong Monetary Authority, the Bank of Thailand and the Central Bank of the United Arab Emirates. The Bank for International Settlements Innovation Hub Centre in Hong Kong endorses the project. 

    The incentive for diversifying away from the dollar system has grown over time due to concerns over the global reach of US sanctions. The US has imposed more than 10 000 unilateral sanctions on foreign entities over the past 20 years. Efforts have intensified under the Biden administration (see Exhibit 1).

    One could argue that the effect is a ‘de-dollarisation’ of trade, with China picking up the slack.

    Salami-slicing tactics

    Individually, the latest developments do not dent the dollar’s supremacy. Take the China-Brazil agreement, which received much international attention, to replace the dollar in most of their bilateral trade. Sino-Brazil trade totals about USD 150 billion a year. China’s cumulative investment in Brazil since the 1990s is about USD 100 billion.

    Now consider SWIFT. It processes about USD 150 trillion worth of payment messages worldwide a year (here), or USD 12.5 trillion a month. If we assume all the China-Brazil trade and investment payments were made in renminbi, that would cut USD 250 billion worth of payments from SWIFT, or only about 0.17% of its annual total.

    However, China is using ‘salami-slicing’ tactics to encourage countries to use the renminbi for cross-border payments. It is already trading with Russia in renminbi (owing to the Western sanctions on Russia) and doing oil trades with countries such as Indonesia, Iran and Venezuela in renminbi.

    The world’s largest commodity exporters and importers – China, Russia and Brazil – are now working together on using renminbi for cross-border payments. Their cooperation could draw other countries to renminbi payments over time and cumulatively, this group could lift the renminbi at the expense of the dollar. Consider the following:

    Some oil market players estimated that switching the oil trade from the dollar to the renminbi, say if Saudi Arabia agreed to the Chinese proposal, would initially affect about USD 800 billion worth of transactions a month[3], or USD 9,600 billion a year.

    Sino-Russian trade totals about USD 190 billion a year (here), and is rising.

    Adding these amounts to Sino-Brazilian trade and investment would take the total to about USD 10 trillion (USD 250 billion + 9 600 billion + 190 billion) – that is 6.7% of SWIFT’s annual payments processing. SWIFT data shows that the renminbi was the fifth most-widely-used global payments currency, accounting for 2.19% of the total in February 2023 (latest data available at the time of writing; see Exhibit 2).

    With about USD 12.5 trillion worth of monthly payment messages moving through SWIFT, the renminbi’s 2.19% amounted to about USD 0.27 trillion a month. Add to that the estimated monthly amount of USD 0.83 trillion (= USD 10 trillion ÷ 12, from Brazil, Russia and oil) that could be settled in renminbi and the Chinese currency’s monthly share of global payments would rise to 8.8% in SWIFT.

    The renminbi would replace the pound sterling as the third most-widely-used global currency.

    The short, medium and long term

    For now, China’s inconvertible capital account is the biggest obstacle to the renminbi becoming a global currency. Crucially, China needs to build global credibility and gain international trust for the world to accept its currency as a global reserve currency. This will likely take a long time to accomplish.

    However, its tactics could further erode the dollar’s declining share in global reserves and boost the share of the renminbi in the coming years (see Exhibit 3).

    Successful economic and reform policies could double the renminbi’s share in global reserves from the current 2.7% and make it the world’s third largest reserve currency ahead of sterling and the yen (see Exhibit 4).

    In the medium term, countries might seek to balance their interests between China and the US by trading with China in renminbi using the CIPS system and with the rest of the world via SWIFT.

    In the long term, a trade and finance system parallel to the US dollar system could take shape and gain critical mass.

    Arguably, one can run, but not hide, even from the Chinese renminbi.

    [1] The Association of Southeast Asian Nations: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Lao PDR, Myanmar, Cambodia  

    [2] See “Chi on China: The Renminbi’s Creeping Internationalisation (II): The Petro-Yuan and the Role of Gold”, 4 January 2023 (here).  

    [3] See reference in footnote 1.  


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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