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| Beijing has not given a roadmap or timetable for its yuan ambitions. (Source: CNBC) |
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Beijing began its efforts to internationalize the yuan in 2009. The months-long debt ceiling debate in Washington could be a watershed moment for China's currency.
According to the SCMP , the US Federal Reserve’s aggressive interest rate hikes – a total of 500 basis points over the past 14 months – have been a “sword” hanging over many emerging markets. These countries have had to scramble to shore up their foreign exchange reserves, the foundation of their economies .
As China gradually recovers from the economic impact of the Covid-19 pandemic, analysts say it has several tools that could “dent” the global financial order, such as yuan investment in Belt and Road Initiative projects, yuan settlement with major trading partners, promoting a digital yuan and diversifying non-dollar reserves.
The world's second-largest economy is shifting from an export-dependent economic model to one that is more focused on domestic consumption and more reliant on imports of goods such as oil and food.
Mr. Sun Yun, Director of the China Program at the Washington-based Stimson Center (USA), commented: "China believes that the US-led financial system, especially the hegemony of the USD, includes rules that go against China's interests."
Beijing has not provided a roadmap or timetable for its yuan ambitions. Rather than seeking to replace the dollar, it has a more realistic goal of using the yuan internationally. There has been progress in trade arrangements between China and its developing partners, an area where Beijing could use its trade advantage to rapidly increase the use of its currency.
Currently, countries such as Russia, Brazil, Argentina, Saudi Arabia and Thailand have accepted the use of yuan to pay for oil, gas and nuclear power.
In addition, the increasing internationalization of the yuan has also reduced China's accumulation of USD reserves.
Beijing has spearheaded overseas projects such as roads, railways and airports under the Belt and Road Initiative, as a way to facilitate trade and investment, accelerating the flow of yuan to more than 60 countries in Asia, Africa, eastern and central Europe and South America.
Not easy to replace USD
However, Mr. Sun said, the yuan cannot replace the USD in the near future.
“The biggest obstacle to the RMB is not just the entrenched role of the USD, but also Beijing’s unwillingness to ‘untether’ from the financial system and loosen its capital account,” said Dexter Roberts, a senior fellow at the Atlantic Council’s Indo -Pacific Security Initiative.
Despite criticism of the US dollar's hegemony and the recurring debt ceiling debate, Wang Jinbin, vice dean of the economics school of Renmin University, said that there is currently no strong alternative to US Treasury bonds.
China is the second-largest holder of U.S. government debt after Japan. China held $869.3 billion in debt in March 2023, up from $848.8 billion in February 2023, with U.S. government bonds accounting for about 27% of China's foreign exchange reserves.
March 2023 marked the first time China increased its holdings of US debt after seven months of reductions, bringing its risk profile to its lowest in nearly 13 years. Beijing’s investment in US Treasuries peaked in 2014 and has been declining ever since.
“We expect a more multipolar monetary system to emerge over the next few decades, but it will be led by the US dollar,” Moody's expert Gabriel Agostini stressed.
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