Ver tambien: https://www.slideshare.net/carlosalbertoaquinorodriguez/internationalization-of-the-yuan-and-latin-americadocx
Carlos Aquino Rodriguez[i]
The world is experiencing a shift in the centre of
economic and political power in the last decades, from the West to the East,
from the Northern part of the hemisphere to the Southern part. The role of
developing and emerging economies is increasing with time. This can be seen in
the growing weight of those emerging and developing economies in indicators
such as Gross Domestic Product (GDP), trade, investment.
But one area where still the role of western developed
countries is still big, despite its diminishing importance in the indicators
mentioned above, it is in the field as the most used international currencies, in
international finance and trade. In these field the United States (U.S.) dollar
is the most widely used. The dollar accounts for more than half of international
reserves, trade transactions, and international lending. This despite the U.S.
representing less than 25% of global Gross Domestic Product (GDP) and no more
than 12% of global trade.
But in the last years other currencies, little by
little, are increasing their importance in the international financial markets
and global trade. One of them and the one that have more possibilities to
compete with the dollar, is the Chinese renminbi (or yuan).
In this article it will be seen how that process is
happening, first by describing the present situation of the dollar and other
currencies use in trade and international finance; second it will be analysed
which conditions will be needed for the yuan to become a widely used
international currency; third, it will be seen how that process in happening in
Latin America, a region with increasing trade and financial links to China; and
last, some Conclusions will be given.
I.
Present situation
of the dollar and other currencies use in trade and international finance.
After the
Second World War, as the United States become not only the biggest economy in
the world but also the most powerful in military and political terms, the use
of its currency, the dollar, become predominant.
But after the
many changes in the world economy, with the increasing importance of the
developing and emerging economies, in particular those in East Asia, like
China, and the decrease in importance of U.S. in the world economy and world
trade, the use of the dollar has been decreasing, for example, in the last 20
years.
As seen in Graph
1, in the year 2000, dollar accounted for around 70% of international reserves,
but in 2022 its share has diminished to around 59%.
Graph 1: Share of the dollar in international
reserves compared to other currencies.
Source: GZERO https://www.gzeromedia.com/by-ian-bremmer/the-dollar-is-dead-long-live-the-dollar
In the following Table it can be seen that, at the
first quarter of the year 2023, of the total of allocated reserves, 59.01% are
claims in US dollars, and in second place is the euro with 19.77% of the total.
After that is Japanese yen and pound sterling. In fifth place are claims in
Chinese renminbi (or yuan) with 2.58% of the total.
Table 1.
World official foreign exchange reserves by currencies (in billion US dollars)
Source: IMF: https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4
In the last years also, some economies are diminishing
their holdings of United States Treasury Securities. For example, China
Treasury holdings peaked at over 1.3 trillion dollars in fall 2013, when it was
the largest, but after that, it has been decreasing[ii].
In June 2022, China holdings were 939 billion dollars, but in June 2023 it was
835 billion dollars. See Table 2.
Table 2: Major Foreign Holders of Treasury
Securities
Source: U.S. Department of
the Treasury https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_table5.txt
The use of
the dollar as a “weapon” by U.S. in the last years is also pushing many
countries to use other currencies. U.S. has implemented economic sanctions
against many countries, beginning with, Cuba, North Korea, Iran, and Venezuela.
The last country to be affected by economic sanctions is the Russian Federation
because of the war in Ukraine. U.S. implemented measures to cut Russia off from
access to dollars. Russian central bank was denied access to most of its
international reserves held in major world currencies at western central and
commercial banks.
Also, in other fields the use of the dollar is still predominant. In
trade invoicing for example it is 50% of the total. In
cross-border loans is 50% of the total, and in foreign exchange transaction
volume its use accounts for 88% of the total. See Graph 2.
Graph 2.
International use of the dollar
Source: GZERO https://www.gzeromedia.com/by-ian-bremmer/the-dollar-is-dead-long-live-the-dollar
But in the last years the
use of the dollar in global trade is being shunned by some countries. The
clearer case is for example Russia, especially in its trade with China. As can
be seen in Graph 3, ten years ago, in 2013, Russian exports to China were settled
more than 95% in dollars, but by 2020 the use of the dollar has decreased to
only 22.7%. And that was before the war in Ukraine and the economic sanctions
imposed on Russia by the U.S.
Graph 3. Use of dollars in
Russia export to China
Source: Atlantic Council https://www.atlanticcouncil.org/blogs/econographics/russia-and-china-partners-in-dedollarization/
Now, according to a
statement given by President Vladimir Putin in the St. Petersburg International
Economic Forum last June, over 80% of trade settlements between Russia and China
are conducted in Russian ruble and Chinese yuan[iii]. As it will be seen
bellow, in the case of Latin America, other countries are also trying not to
use dollars in their trade transactions and in investment projects, instead
using yuan. This means the internationalization of the yuan is advancing and
more countries are involved in the process.
II.
Which conditions will be needed for
the yuan to become a truly international currency?
China is now the second biggest world economy, with
around 18% of the total[iv].
It is the largest global trader, with a share of 13% of the total[v].
It is the third largest investor in the world (in the year 2022, but it was the
second largest in 2021)[vi].
But still the use of the yuan as an international
currency is minor, despite its weight in the world economy. What would be
needed for China´s currency to increase its presence in world trade and
finance?
For this perhaps it is useful to see why the dollar is
widely used. Among other reasons for that are:
1.
There are no capital controls for the
inflow or outflow of dollars in U.S. This free movement of capital is one of
the most appealing features for foreigners to hold dollars, either in U.S. or
abroad.
2.
The exchange rate of the dollar is
freely determined by the market.
3.
U.S. financial market offer an
abundance of dollar-denominated assets that foreign investors can freely trade.
4.
Also, it is said that U.S. offer
stable government institutions, independent central bank, strong property rights,
and a robust rule of law.
To the above it should be added that U.S. was also
able to push for the wider use of the dollar through its dominance of
international financial institutions like the World Bank and the International
Monetary Fund.
Then, China must work for a freer movement of its capital.
Its currency should be freely tradable (convertible), and the yuan exchange
rate should be determined totally free of any interference. Besides this,
Chinese monetary policy should be more transparent and stable. Its capital
market should offer more attractive instruments for foreigners to invest in
yuan, with little restrictions. All these measures should be done gradually
considering the interest of the national economy and to avoid speculative
movements of capital that could destabilize the country.
China is also working to increase its presence in the
international financial market by way of the establishment, with other
countries, of institutions like the Asia Investment and Infrastructure Bank,
AIIB, and the New Development Bank or BRICS Bank. Dilma Rousseff, the head of
the New Development Bank recently said that the Bank is planning to lend in
Brazilian and South African currencies to reduce reliance on the dollar[vii].
III.
How is the internationalization of
the yuan happening in Latin America?
For Latin American countries, that have increasing
economic links with China, it would be natural to settle their economic
transactions not in dollars but in yuan. But even if still the use of the
Chinese currency in the region is minor, compared to the dollar[viii],
some countries are moving to increase the use of the yuan in its economic
transactions with China or even with other countries.
Among the reasons for that is that indeed trade and
investment relations of China with Latin American countries are becoming more
important. For example, as can be seen in Table 3, for countries like Brazil,
Chile, Peru, Uruguay, their main export market is China, and for countries like
Argentina, Bolivia, Brazil, Chile, Peru, and Paraguay, their main source of
imports is China.
Table 3. First and second main partner in total
exports and import of goods in some Latin American countries, year 2022, in percentage.
|
Country |
Imports |
Exports |
|
Argentina |
1. China 20.8% 2. Brazil 19.9% |
1. Brazil 14.3% 2. China 8.9% |
|
Bolivia |
1. China 19.4% 2. Brazil 15.1% |
1. India 16.5% 2. Brazil 13.8% |
|
Brazil |
1. China 22.2% 2. U.S. 18.9% |
1. China 26.8% 2. U.S. 11.2% |
|
Chile |
1. U.S. 23.9% 2. China 23.1% |
1. China 37.9% 2. U.S. 15.2% |
|
Colombia |
1. U.S. 24.5% 2. China 24.1% |
1. U.S. 30.9% 2. Panama 14.6% |
|
Ecuador |
1. U.S. 25.9% 2. China 22.0% |
1. U.S. 27.7% 2. China 17.6% |
|
Peru |
1. China 26.1% 2. U.S. 23.6% |
1. China 30.0% 2. U.S. 14.5% |
|
Paraguay |
1. China 29.5% 2. Brazil 23.5% |
1. Brazil 36.8% 2. Argentina 19.5% |
|
Uruguay |
1. Brazil 19.9% 2. China 18.1% |
1. China 21.4% 2. Free Zones 19.0% |
Source: Trade Map, Data for Cuba and Venezuela is very
outdated
China has Free Trade Area (FTA) agreements with Chile,
Peru, Costa Rica[ix],
and this year it has signed FTAs with Nicaragua, and Ecuador. These agreements
will help increase trade between China and countries in the region.
China is also becoming an important investor in the
region. It began in the 1990s investing in the natural resources sector but now
invest in several sector, like infrastructure and manufacturing sector. For
example, it is estimated that Chinese Foreign Direct Investment, FDI stock at
the end of 2022 was 24% of the total in Peru, 22.8% in Argentina, and 9.5% in
Brazil[x].
Up to now, 21 countries in the region has joined the
Belt and Road Initiative: These countries are (in order of joining it, from the
first to the last): Panama, Trinidad and Tobago, Surinam, Dominica, Bolivia,
Guyana, Uruguay, Costa Rica, Venezuela, Grenada, El Salvador, Chile, Dominican Republic,
Cuba, Ecuador, Antigua and Barbuda, Barbados, Jamaica, Peru, Nicaragua, and the
last one, Argentina, which joined in February 2022[xi].
Several Latin American countries have joined the Asia
Investment and Infrastructure Bank, AIIB: Argentina, Brazil, Chile, Ecuador, Peru,
and Uruguay[xii],
and Bolivia and Venezuela are prospective members.
China has bilateral swap lines (BSL) with several
Latin American countries. In a BSL central bank of two countries agree to
acquire each other´s currency in exchange of its own. Argentina, Brazil, Surinam,
and Chile central banks have established BSL with China.
In concrete terms, for example in august this year
Argentina signed a deal with China´s central bank to settle more than half of
the 2.7 billion dollars debt due to be paid the first week of that month to the
IMF. For this it used the yuan equivalent to 1.7 billion dollars under the swap
arrangement it has with the People´s Bank of China[xiii].
Regarding investment, also in Argentina in august it
was announced that a Chinese company, Brunt Recycling, did through Bank of
China an investment in its business of lithium, of 428,736 yuan, or an equivalent
of 58,892 dollars[xiv].
In trade, from May this year Bolivia began using yuan
to pay for some exports and imports. Bolivia Economic Minister said in June
that between May and July his country conducted financial operations amounting
to 278 million yuan (around 38.7 million dollars)[xv].
In august Brazil proposed to Argentina that it could
use yuan guarantees in its exports. In this way Brazilian companies will be
provided with yuan guarantees under a credit line of an equivalent of 144
million dollars, to be offered to Argentine importers[xvi].
This proposal involves Argentina providing yuan-denominated guarantees that
match the credit line amount.
Still, the countries in Latin America that are using
yuan in their international transactions, are countries that have some problems
with balance of payments and scarcity of dollars, like Argentina and Bolivia.
But it is foreseeable that in the future more Latin American countries would
use yuan.
One interesting case is Brazil, that for example, with
President Lula, is a strong advocate of using a different currency than the
dollar. Brazil reached an agreement with China to access the Cross-border
Interbank payment System, the China equivalent to international financial
messaging service Swift[xvii],
in April this year. Also, Brazil´s yuan-denominated foreign exchange assets
reached a percentage of 5.37% at the end of 2022, the second largest after the
dollar and surpassing the euro assets[xviii].
Conclusions
-
Several
countries are beginning to use other currencies than the dollar, among other
reasons, because U.S. use its currency as a “weapon.”
•
Given
China growing presence in the world economy, global trade, and international
finance, use of its currency will increase.
•
But
for the yuan to become a widely used international currency China should execute
some reforms
•
Through
institutions like the AIIB, the New Development Bank, and Chinese lending,
international use of its currency will increase.
•
Given
the strong economic links between Latin American countries and China, it will
be natural for them to use more yuan.
September 17th, 2023
[i] Carlos Aquino Rodriguez is
Director of the Centre for Asian Studies, National University of San Marcos,
Lima, Peru.
[ii] Nikkei Asia: China´s U.S.
Treasury holding hit 12-year low on rate hikes, tensions https://asia.nikkei.com/Business/Markets/Bonds/China-s-U.S.-Treasury-holdings-hit-12-year-low-on-rate-hikes-tensions
[iii] Global Times: Over 80% of
Russia-China trade settlement now using local currencies: Russian
president https://www.globaltimes.cn/page/202306/1292737.shtml
[iv] The World Bank data: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?view=chart
[v] See WTO World Trade Statistical
Review 2023 https://www.wto.org/english/res_e/booksp_e/wtsr_2023_e.pdf
[vi] See UNCTAD: World Investment Report 2023 https://unctad.org/publication/world-investment-report-2023
[vii] Financial Times: BRICS banks strive
to reduce reliance on the dollar https://www.ft.com/content/1c5c6890-3698-4f5d-8290-91441573338a
[viii] The Dialogue: China´s RMB isn´t set
to outpace the dollars in Latin America...yet https://www.thedialogue.org/blogs/2023/06/chinas-rmb-isnt-set-to-outpace-the-dollar-in-latin-americayet/
[ix] See WTO http://rtais.wto.org/UI/PublicSearchByMemberResult.aspx?MemberCode=156&lang=1&redirect=1
[x] Based in data by the American
Enterprise Institute in its report of July 2023: “China´s Global Investment
surges, finally” https://www.aei.org/research-products/report/chinas-global-investment-surges-finally/, and UNCTAD: World Investment Report 2023 https://unctad.org/system/files/official-document/wir2023_en.pdf
[xi] Global Times: China, Latin America
brace for deeper ties in BRI cooperation https://www.globaltimes.cn/page/202304/1288649.shtml
[xiii] Caixin: Argentina taps China
currency swap line to help repay IMF loan https://www.caixinglobal.com/2023-08-03/argentina-taps-china-currency-swap-line-to-help-repay-imf-loan-102089663.html
[xiv]
Telam: El Banco de China realizo la primera inversión directa en yuanes en
Argentina https://www.telam.com.ar/notas/202308/638731-banco-de-china-yuan-inversiones-argentina.html
[xv] AP: Bolivia is the latest South
American nation to use China´s yuan for trade in challenge to the dollar https://apnews.com/article/yuan-bolivia-trade-argentina-brazil-dollar-696bfb7c5ab68d4f0a87a7f6557678f0
[xvi] Reuters: Brazil propose yuan
guarantees for exports to Argentina,
finance minister says https://www.reuters.com/business/finance/brazil-proposes-yuan-guarantees-exports-argentina-finance-minister-says-2023-08-23/
[xvii] Swift stands for “Society for
Worldwide Interbank Financial Communications”
[xviii] South China Morning Post: Which 8
countries are using China´s yuan more, and what does it means for the US
dollar? https://www.scmp.com/economy/economic-indicators/article/3220087/which-8-countries-are-using-chinas-yuan-more-and-what-does-it-mean-us-dollar
