sábado, 30 de septiembre de 2023

Internationalization of the yuan and Latin America

 

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.

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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)

Imagen que contiene Tabla

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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

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Descripción generada automáticamente con confianza media

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 

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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

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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

[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/

[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

[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

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