In 2023, China’s currency the renminbi, or yuan, achieved a remarkable surge in its cross-border use, marking a significant departure from its historically stagnant global payment share.
Since China initiated efforts to internationalize its currency in 2004, the yuan’s share in global payments had hovered around 1.9%.
However, in a surprising turn of events, this figure skyrocketed to 3.6% by October this year – and we anticipate this trend is poised to gain even more momentum in 2024.
One of the primary catalysts behind the accelerated internationalization of the yuan is the shifting geopolitical landscape. In recent years, geopolitical tensions have intensified, prompting countries and businesses to diversify their currency holdings and transactions.
Given the escalation of Western sanctions on Russia following its invasion of Ukraine in 2022 and growing tensions with the US over Taiwan, China has actively pushed the importance of reducing reliance on the US dollar and other Group of Seven currencies.
These sanctions appear to have spurred other countries to adopt the renminbi for trade settlements. China’s preparedness with its own Cross-Border Interbank Payment System (CIPS) during the onset of Western sanctions against Russia has undoubtedly played a crucial role.
China’s Belt and Road Initiative (BRI) has played a pivotal role in driving the cross-border use of the yuan.
As the BRI expands its reach across continents, facilitating infrastructure development and fostering economic ties, an increasing number of nations are opting to conduct transactions in yuan.
The People’s Republic’s strategic investments in partner countries, coupled with the ease of using the yuan for trade within the BRI framework, have contributed, we can assume, significantly to the currency’s rising prominence on the global stage.
This is coupled with China’s commitment to financial reforms and market liberalization. The gradual opening up of the country’s capital markets, along with efforts to ease restrictions on cross-border capital flows, has bolstered confidence in the yuan as a viable and stable currency for international transactions.
Investors and businesses are increasingly attracted to the opportunities presented by the Chinese market, further fuelling the use of the yuan in global payments.
There’s also the proactive approach to digital currency innovation which is playing a role in the increased cross-border use of the yuan.
The development and piloting of the digital yuan, the country’s central-bank digital currency (CBDC), have garnered international attention.
As more nations explore the possibilities of adopting digital currencies, the yuan, with its digital counterpart, is well positioned to be at the forefront of this financial evolution, simplifying cross-border transactions and trade settlements.
As we look ahead to 2024, this momentum is likely to persist, driven by a confluence of factors that position the yuan as a frontrunner in the shifting landscape of international finance.
Businesses, investors, and nations around the world are adapting to this evolution, recognizing the opportunities presented by the growing influence of the renminbi in cross-border transactions.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.
