In this Asia House research, Phyllis Papadavid, Senior Research Advisor at Asia House, explores the Macroeconomic shifts and digital developments are likely to increase the renminbi’s (RMB) share of global trade finance.
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• Use of the RMB as a trade settlement currency has already more than doubled over the last 12 months, albeit from a low base.
• China’s economic, financial and cross-border trade dynamics are likely to continue to accelerate the RMB share in global trade finance
• On current trends, RMB usage in trade finance could match, or even surpass, the euro in the next two years.
• This will be driven by China’s growing energy demand and its closer trading ties with the Middle East.
• On the macroeconomic side, RMB trade settlement could be spurred by US dollar and euro volatility, RMB swap facilities and the petro-yuan’s prominence.
• The petroyuan is showing signs of challenging the petrodollar system as China surpasses the US for the recycling of Gulf Cooperation Council (GCC) oil receipts.
• The development of China’s digital currency (e-CNY), China’s clearing systems, and the digitalisation and liberalisation of China’s bond market, could also accelerate the use of the RMB as a trade settlement currency.
• The RMB could leapfrog traditional ‘reserve currency’ barometers through digitalisation and cross border usage of e-CNY.
• Asia’s regional economic and institutional partnerships will also favour the RMB.
The internationalisation of the renminbi (RMB) continues apace. Its use in trade settlement has grown exponentially – albeit from a low base – and that trend is likely to continue. On current trends, the RMB share in global trade finance could overtake that of the euro in the next two years.
US dollar dominance is in no immediate danger given the depth, breadth, and scale of US financial markets. The dollar will also continue to benefit from its current widespread use, or network externality, in that any emergent currency would have to overcome the inertia associated with switching to it.
That said, sudden changes have been known to reconfigure the currency landscape. This briefing examines three macroeconomic and three digital pathways that could serve as RMB tipping points in global trade finance.
At the macroeconomic level, RMB trade settlement could be spurred by US dollar and euro volatility; RMB swap facilities could continue to boost partner countries’ exports, leading to more RMB invoicing; and the petroyuan will continue to help China surpass the US in meeting Gulf Cooperation Council oil receipts.
The three digital RMB tipping points analysed are the cross-border usage of China’s central bank digital currency; China’s expanding and digitalised clearing systems; and the ongoing liberalisation and digitalisation of China’s fixed income market (estimated at US$12tn, the second largest in the world).
Any number of these factors could underpin a more global RMB as a widely used, liquid, and a stable store of value. China’s growing economic, trading and geopolitical assertiveness could trigger any or all these tipping points, or unknown interactions between them.
Asia’s regional economic and institutional partnerships will continue to be a point of gravity that will underpin the RMB’s use in global trade finance too. In this context, China’s role in global supply chains will also be RMB supportive.
- Renminbi resilience vs dollar dominance
The ‘exorbitant privilege’ of the US dollar as the dominant global reserve currency (Eichengreen, 2011) is due in large part to the depth breadth and scale of the US financial market. Operationally, the dollar profits from its well-documented ‘network externality’ in that any new reserve currency would have to overcome the inherent inertia associated with people switching to the use of a new currency in trade transactions and in currency interventions.
Renminbi use is nonetheless becoming increasingly widespread, fuelling discussion about how much it will counterbalance US dollar dominance. The key tipping point is whether the Renminbi’s use will grow from regional to global importance (Eichengreen and Lombardi, 2015) and whether it will become an international currency.  Beyond increasing its share in foreign central banks’ reserve holdings, its role as an international currency requires several macroeconomic and financial preconditions to be met. (Chinn and Frankel, 2005).
When it comes to its share of global trade finance, RMB usage has made great strides, though it is nowhere near challenging the dollar’s prevalence. The RMB share of global trade finance is likely to continue to increase and could be accelerated by macroeconomic and digital developments. This could be a part of a broader set of pathways that will situate the RMB in the global currency architecture (Figure 1). Macroeconomic shifts and digitalisation will add impetus to RMB internationalisation along with China’s broader financial market liberalisation and economic integration.
Currency developments within global trade finance matter cumulatively and over the long term. What currency an import is invoiced in (and the currency denomination of short-term external debt) has significant effect on the currency composition of FX reserves. It reflects a central bank’s need to hold a sizeable portion of their holdings in the currencies of their external debt and the currencies of their main trading partners. A currency’s return also has significant effect, consistent with the existence of the investment tranche in central banks’ portfolios (IMF 2022; Lu and Wang, 2019).
- China’s rising share in global trade finance
The use of the RMB outside China is still limited. However, its role in global trade finance and in other cross-border investments is rising exponentially from a low base. The People’s Bank of China (PBOC) has instituted several policies consistent with RMB internationalisation. The most prominent of these has been the introduction of multiple bilateral swap lines and offshore clearing banks. Additionally, bond market liberalisation, digitalisation, and China’s more assertive geopolitical stance will also bolster the RMB.
2.1. Global trade finance: the renminbi to match the euro?
RMB usage has been on the rise for some time. SWIFT indicates that over 100 countries have been using RMB for almost a decade. The RMB share of the global trade finance market has risen from less than 2 per cent in February 2022 to 4.5 per cent in March 2023. This has been driven in part by Russia’s invasion of Ukraine, which prompted greater use of China’s currency to circumvent sanctions and to avoid the higher cost of US dollar financing (Lockett and Leng, 2023).
Based on current trends, it is likely that China’s energy demand, its closer trading relationships with the Middle East, as well as a bounce-back in cross-border trade with Asia will propel even greater usage of the RMB. Based on recent growth rates, its share of trade finance could match or even surpass that of the euro’s (6.41 per cent) by 2025.
There are obstacles, however. One is the limited depth, breadth, and availability of financial instruments and the lack of necessary financial linkages associated with the RMB as an invoicing currency (Devereux and Shi, 2013; IMF 2022; Lyonnet et. Al., 2020). Political factors weigh too: India, for example, has expressed opposition to RMB-invoicing of its Russian oil imports (Acharya et. Al., 2023).
The RMB’s non-convertibility and the limited nature of China’s financial derivatives market to hedge against potential RMB volatility have been cited as limiting factors for the currency’s usage – including by Russia itself. Exporters and importers cannot easily convert RMB as most of their trading contracts are still denominated in US dollars and euros. Given this, RMB usage in trade settlement does not currently equate to it being a fully functioning store of value. This requires further capital account liberalisation.
2.2. RMB macroeconomic tipping points
If RMB usage continues at the current pace, it will lead to a further fragmentation of the US-dollar based multilateral clearing system (Poenisch, 2023). Looking ahead, RMB usage is likely to increase, particularly if three macroeconomic tipping points take hold:
- China’s top trading partners move to RMB invoicing. US dollar (and euro) exchange rate fluctuations have led to higher sensitivity to FX in trade volumes (Boz et al., 2022) boosting other currencies. In Japan, for example, local currency invoicing has been on the rise (CEPR, 2021) within Asia trade. Most recently, Brazil agreed to clear all trade with China in RMB. If more than half of China’s top 10 trading partners follow suit, a tipping point could further accelerate RMB trade invoicing – and its consequent use as a reserve currency (Gopinath and Stein, 2021).
- RMB is boosted through currency swap lines. RMB swap facilities boost partner countries’ trade and exports. Trade-deficit economies, and those with lower reserves, have seen export increases after signing currency swap agreements with China (Hao et. Al., 2022). This suggests that further usage of the RMB will come as swap lines are instituted. In addition, an increase in and presence of PBOC swap lines boosted bailout financing to countries in economic distress between 2008 and 2021 (US$240bn), positioning China as an important lender of last resort to developing and emerging economies in need of finance.
- The petroyuan rises as a counterbalance to the petrodollar. Trade in oil, settled through China’s PBOC-backed cross-border interbank payment system (CIPS), has facilitated China’s RMB-invoiced oil trade with Russia and with Saudi Arabia (Lo, 2023). The effectiveness of the petrodollar regime could continue to be eroded as China has surpassed the United States as the largest destination for the GCC oil receipts (Alshareef, 2022; Jin, 2022; Salameh 2018). Crucially, making RMB oil trades convertible into gold also effectively turns the RMB into a globally investable asset, making it more attractive (Lo, 2023). A key tipping point would be further convertibility of the RMB.
2.3. Digital tipping points will bolster a global RMB
US dollar dominance is likely to endure given its overwhelming global role (Eichengreen, 2011), accounting for around 84 per cent of global trade finance . But the digitalisation of China’s financial links could reduce the US dollar’s advantage. Historical instances of sudden changes, or tipping points, suggest that new developments, such as the emergence of digital currencies and new payments ecosystems, could reconfigure the currency landscape (IMF, 2022; Chinn and Frankel, 2005).
Digitalisation of China’s financial linkages could lead to the following RMB tipping points:
- The digital eCNY currency boosts the RMB reserve share. China’s central bank digital currency could increase demand for reserves denominated in RMB (IMF, 2022), particularly at a time when cross-border financial links are a core reserve share determinant in emerging countries (ibid., 2022). The ease of transfer between smartcard, digital wallet, or central bank account, and the centralised ledger is essential and being largely facilitated (Eichengreen, 2022).
- China’s digitalised clearing systems continue expanding. A growing number of countries are looking to establish RMB multilateral clearing systems. An illustration can be found in Rio-based Banco Bocom BBM’s connection to China’s CIPS in relation the China-Brazil RMB trade deal (Choi, 2023). More broadly, multilateral clearing as a digital tipping point would occur by linking various national central bank digital currencies or using one vehicle currency, such as the eCNY (BIS, 2022).
- Liberalisation and digitalisation of China’s bond markets grows. Offshore RMB-bond issuance has surged with Dim Sum bond offerings — RMB-denominated debt sold in Hong Kong—rising an annual 145 per cent in July 2022, while Free Trade Zone bonds have also been in demand (Kumar 2023; Murdoch 2023). China’s onshore bond market is valued at US$12 trillion, second largest in the world, and further opening will be catalytic for the RMB. Deutsche Bank’s inaugural Panda Bond and the Bond Connect link are examples of this demand. Meanwhile, the US$5 trillion Swap Connect scheme will offer investors the ability to hedge risk associated with RMB debt (Lockett and Leng, 2023).
- Looking ahead: renminbi’s regional vs global prospects
China’s economic, financial, and cross-border trade dynamics are likely to continue to increase the RMB’s share in global trade finance. It is likely that the RMB share will match, or even surpass the euro’s 6.4 per cent share in two years. China’s macroeconomic and digital growth is likely to significantly accelerate RMB usage in the years ahead, most likely predicated on PBOC policies, financial liberalisation and the digitalisation of the RMB and RMB-denominated assets.
Any international currency that is used in trade or garners greater FX reserve share is one that is widely used, liquid, stable and is increasingly supported by growing economic and trading relationships – and by geopolitical ones. In this context, a more assertive Chinese foreign policy presence could add to the RMB’s prominence – for example through further RMB-invoiced oil purchases, through third party countries, in response to the Ukraine-Russia conflict, or as a result of China’s seeking to broker peace deals, such as the restoration of Saudi Arabia-Iran diplomatic ties (Hafezi et. al., 2023) and its involvement in Israel-Palestine talks (AP, 2023).
Ultimately, RMB usage could contribute to further de-dollarisation in global trade finance and in broader financial and economic transactions. Reaching tipping points will be essential in determining the degree to which the RMB will grow in global importance. China’s more assertive geopolitical stance, if accompanied by a larger, deeper and more liberalised financial market, could significantly bolster use of the RMB. Signs of this are emerging, including in relation to PBOC currency intervention (Bloomberg, 2023). Digitalisation and China’s RMB oil invoicing may expedite its share of global reserves.
 An international currency functions as a store of value, a medium of exchange and a unit of account for both residents and non-residents and it can used for both private purposes, for trade and financial transactions and for public purposes (such as in official reserves or an anchor currency for pegging) (Chinn and Frankel, 2005).
 SWIFT is the international payments and financing platform which functions as a messaging system banks use to send instructions to banks in other countries.
 Data from SWIFT (2023).
 Broadly defined, a currency swap line is an agreement between two central banks to exchange currencies. When the need for RMB liquidity arises for trade or financial transactions, a foreign central bank can activate the swap line and request the PBOC to deposit RMB to its account, then lend on to foreign financial institutions. The equivalent amount of local currency would be deposited at the PBOC as collateral. See: https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/currency_swap_lines.en.html
 Gazprom Neft, has been settling its crude oil sales with China (one-third of its total sales) in renminbi since 2015 (Farchy, 2015)
 Bond Connect allows investors from Mainland China and from overseas to trade in each other’s bond markets through a market infrastructure linkage in Hong Kong. For further details see: https://www.chinabondconnect.com/en/index.html
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