China is actively advancing the process of yuan internationalization through loans facilitated by the Belt and Road Initiative (BRI) following a significant surge of yuan usage for global payments.
On Wednesday, China wrapped up its Belt and Road Forum, which was attended by 130 countries. At the event, Chinese policy lenders signed yuan-denominated loan agreements with several foreign banks to support BRI projects.
The China Development Bank signed loan contracts with Malaysia’s Maybank, Egypt’s central bank and BBVA Peru. Meanwhile, the Export-Import Bank of China signed a loan agreement with Saudi National Bank.
Based on China’s first-ever white paper on BRI, released just before this week’s forum, Beijing has entered into “over 200 BRI cooperation agreements with 150+ nations and 30 international organizations spanning five continents.”
By financing development projects through the BRI, China has become a significant contributor and now rivals the World Bank in scale. According to the Chinese government, the initiative has financed over 3,000 projects and attracted almost $1 trillion in investment.
“Amid rising currency volatility globally, the BRI provides a good opportunity to expand the RMB’s international clout,” China International Capital Corp (CICC) wrote.
Yuan’s wide usage in trades
Global yuan acceptance has increased due to geostrategic tensions, such as the Russia-Ukraine war and high U.S. interest rates.
According to Global Times, the yuan has become the fifth-largest currency in the world for reserves, payments and trading. It has also become the third-largest currency for trade financing. It is a significant rise from its 35th place in 2001.
In May 2022, the International Monetary Fund (IMF) increased the yuan’s weight in the Special Drawing Rights (SDR) currency basket from 10.9 percent to 12.3 percent.
According to SWIFT data, the yuan’s share of global payments by value hit a record high of 3.71 percent in September, higher than the 2.77 percent of the previous month and almost double from 1.91 percent in January. However, the amount is still negligible compared to the dollar’s share of 46.6 percent.
China’s growing economic strength, global influence and yuan internationalization prompt countries to promote currency arrangements and partnerships with China.
The latest example is the Chinese company Universal Energy, which signed a power purchase agreement (PPA) with the government of Uzbekistan and settled it in yuan.
In China’s own international transactions, the share of yuan settlements exceeded that of the U.S. dollar for the first time in the second quarter, reaching 49 percent.
According to Wang Peng, an associate research fellow at the Beijing Academy of Social Sciences, yuan internationalization will benefit China and the countries that use it for settlement.
Yuan internalization will facilitate China’s economic growth, boost the efficiency of outbound trade and support the global development of domestic industries. For other countries, it will improve trading efficiency and reduce losses caused by exchange rate fluctuations.
However, Natixis economist Garcia Herrero said that the yuan is still far from challenging the dollar’s dominance due to its small share in the oil trade. In addition, there is the recent decline in foreign holdings of Chinese stocks and bonds. She also warned that a currency favored by a particular bloc is less likely to be accepted as a reserve currency.
In other news, the European Union will host leaders from around 20 countries next week in the Global Gateway Forum to promote its global infrastructure plan, designed to compete with China’s BRI in critical regions.
Heads of state or government from Bangladesh, Senegal, Namibia and Moldova are expected to attend in Brussels on October 25-26.