The world is slowly drifting away from the US dollar as the sole reserve currency
- More than 60 central banks are showing interest in increasing their foreign reserves in Chinese yuan
- In future, the US dollar may be viewed as just one of several leading currencies alongside the yuan
There is growing resentment with the way the United States uses the privileged status of its currency within the international financial system as an instrument of its national policies. The latest expression of this came on February 1, when Germany, France and Britain launched an EU-backed payments system to help businesses circumvent unilateral US sanctions against Iran. Named the Instrument for Supporting Trade Exchanges, it is designed to act as a kind of euro-denominated clearing house for trade with Tehran.
Meanwhile, more than 60 central banks are showing strong interest in increasing their foreign reserves in the Chinese yuan and diversifying away from the US dollar. In June 2017 the European Central Bank for the first time switched 500 million euros (US$564.78 million) of its foreign exchange reserves from US dollars to yuan. According to the International Monetary Fund (IMF), during the third quarter of 2018 holdings of yuan assets by global central banks increased to US$192.54 billion, 1.8 per cent of all reserves.
France’s central bank and the German Bundesbank recently included the yuan in their foreign exchange reserves. The central banks of Belgium and Slovakia already possess yuan assets, while those of Spain and Switzerland have also expressed their interest in the currency. Central banks in Africa, Central and Southeast Asia have even bigger shares of their foreign exchange reserves in yuan.
It was reported in January that during the second quarter of 2018, joining the trend, the Bank of Russia twice reduced the amount of its foreign exchange held in US dollars and moved the equivalent of US$44 billion each into euros and yuan, with another US$21 billion invested in the Japanese yen. The share of Russian foreign exchange reserves held in yuan has increased from five to 15 per cent. That means that Russia’s yuan share is about 10 times the average for global central banks, with its total holdings of the currency constituting about a quarter of world yuan reserves.
Standard Chartered Bank predicts that the yuan, currently the world’s sixth most used currency for payments (its share in global payments stood at 1.7 per cent in October 2018), will be the fourth most used by 2020, after the US dollar, the euro and the pound. According to the People’s Bank of China, US$545.5 billion (3.71 trillion yuan) worth of cross-border trade was settled in yuan in the first three quarters of 2018.
The Beijing-led “Belt and Road Initiative” envisages the introduction of swap facilities in the countries of the region involved. China has bilateral currency-swap agreements with more than 30 countries and a lot of belt and road participants signed or renewed such agreements in 2018. There is now an opportunity for China to promote settlement in yuan or other national currencies with belt road partners and other countries too. It is already switching to national currencies in bilateral trade with Russia, Iran and Pakistan and has also signalled support for Turkey’s plan to drop the dollar.
The world’s largest importer of crude oil and its second largest consumer, China in 2018 launched its first crude oil futures contract denominated in yuan on the Shanghai Stock Exchange. There is talk of creating a yuan-denominated benchmark for oil (with the emergence of the so-called petroyuan), and Iran, Russia, Saudi Arabia and Venezuela are ready to accept yuan and national currencies for the settlement of oil purchases.
Despite all the risks of currency fluctuations this is the way to establish a global rival for WTI (West Texas Intermediate) and Brent crude oil benchmarks and to reducing the dominance of the US dollar in commodities trade.
As China has emerged as the world’s second largest economy it is natural for this to be reflected in the international status of the yuan. This does not mean that the yuan is likely in the near future to displace the greenback like the US dollar displaced the British pound as the world’s leading currency after the second world war. What is more likely is that the US dollar will become just one of several leading currencies including the yuan.
“Ultimately, we will have reserve currencies other than the US dollar,” the Bank of England Governor Mark Carney predicted last month.
Donald Gasper is a Hong Kong-based analyst and commentator
