Originally published at Project-Syndicate | March 10th, 2023
China was supposed to be the main beneficiary of a shift away from the dollar by countries fearing its “weaponization” by US authorities. So why isn’t diversification toward the renminbi visible in data on foreign reserves and international payments?
BERKELEY – When the United States and its G7 partners imposed sanctions on Russia’s central bank and barred Western financial institutions from doing business with Russian counterparties, commentators warned of far-reaching changes in the global monetary and financial order. Other countries would see those sanctions as yet another step in the West’s “weaponization” of finance. Fearing that they, too, might one day be on the receiving end of sanctions, governments and central banks would reduce their dependence on the dollar, US banks, and the US-dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT).
China would be the principal beneficiary, these predictions continued. So far, China has sought to remain above the fray in the dispute between Russia and the West. It has a large banking system. It has created a Cross-Border Interbank Payment System to facilitate renminbi settlement and provide an alternative to Fedwire and the Clearing House Interbank Payments System (CHIPS) through which dollar payments are made.
Russia already accepts renminbi in payment for fully 14% of its exports. Its sovereign wealth fund holds $45 billion worth of renminbi securities and deposits, and Russian companies issued $7 billion worth of renminbi-denominated bonds last year.
Given Russia’s circumstances, none of this should come as a surprise. But will other countries also move in this direction? When President Xi Jinping visited Saudi Arabia late last year, there was talk of the Saudis taking payment for their oil exports in renminbi. China has recently concluded renminbi clearing arrangements with Pakistan, Argentina, and Brazil. Just last month, Iraq’s central bank announced a plan to allow direct renminbi settlement for trade with China.
Yet this kind of broader shift is not yet visible in the data. According to the International Monetary Fund, the renminbi’s share of global foreign exchange reserves remains less than 3% of the reported global total. Moreover, the renminbi accounts for less than 2% by value of all instructions for cross-border interbank payments sent through SWIFT.
To be sure, not all countries report the currency composition of their foreign reserves, and the countries most worried about sanctions are the least likely to report. And, instead of using SWIFT’s electronic messaging service, their banks are most likely to arrange cross-border transfers through old-school alternatives like email, telephone, and fax.
But, special cases like Russia notwithstanding, there is also reason to think that China has limited gravitational pull financially. US complaints that China may be helping Russia with war materiel raise the possibility that Beijing could become subject to secondary sanctions, in which case there will be little if any scope for doing cross-border business via Chinese banks.
Moreover, China’s government has repeatedly changed its posture toward the private sector. This points to the possibility that it may change terms of access for foreign central banks holding reserves in Shanghai and for commercial banks seeking to transfer funds through its cross-border payment system. China’s capital controls provide levers with which to make such changes, and Xi’s centralization of power means that there are few countervailing forces to prevent him from taking such steps were he so inclined.
Rather than putting their eggs in China’s basket, other countries, in Asia and elsewhere, have been seeking to use their own currencies for cross-border payments. Singapore and Thailand have connected their real-time fast payment systems, PayNow and PromptPay, enabling customers of participating banks to transfer funds between the two countries using just a mobile number. Similarly, Bank Negara Malaysia and the Bank of Thailand have expanded their ringgit-baht direct settlement framework to enable Malaysians and Thais to make direct payments through qualified commercial banks. Five Southeast Asian central banks have signed an agreement to link their fast payment systems, bypassing the need to use either the dollar or the renminbi for cross-border transfers. And Indonesia, during its G20 presidency, established a Local Currency Settlement Task Force to identify regulatory reforms to encourage the practice.
Similarly, on the foreign-reserves front, diversification away from the dollar has not meant diversification toward the renminbi, in the main, but rather toward the Korean won, Singapore dollar, Swedish krona, Norwegian krone, and other nontraditional reserve currencies.
These trends reflect not so much geopolitics as developments in technology. Because payment systems like PayNow and PromptPay are digital natives, they are readily linked, removing the need to use the dollar or renminbi when transferring funds. The currencies of these smaller countries have also become easier to hold and cheaper to trade with the rise of digital foreign-currency platforms featuring automated market-making and liquidity-provision algorithms. This, in turn, makes such currencies more attractive for payments and as a form of international reserves.
The presumption has been that geopolitics will reshape the global monetary and financial order in China’s favor. But technology may have the final say. And, if it does, it may alter that order in a very different way.
Barry Eichengreen: Professor of Economics at the University of California, Berkeley, is a former senior policy adviser at the International Monetary Fund. He is the author of many books, including In Defense of Public Debt (Oxford University Press, 2021).