Media coverage of China’s efforts to supplant the US dollar’s reserve currency status has reached a feverish pitch. Diplomatic announcements, ceremonial oil contracts, and narrowly selected data suggest that foreigners are increasing their acceptance of non-USD trade with China.
However, China’s fiat is nowhere close to overtaking the US dollar. USD denominates over 88% of foreign exchange (FX). According to SWIFT, the world’s dominant bank wire network, less than 3% of international wires contain China’s fiat.
SWIFT ranks China’s fiat fifth for international wires as of March 2023 — USD continually tops that leaderboard, followed by EUR, then GBP, then JPY.
Over half the world’s business denominates commerce in USD or a USD-pegged currency. Focusing on the world’s largest business, oil, over four-fifths of global oil contracts use USD pricing.
Importantly, Hong Kong is China’s international financial center. An overwhelming 73% of Chinese cross-border currency flows occur with Hong Kong, which it controls. Moreover, through a complex arrangement with the Hong Kong Dollar (HKD), which is pegged to the US dollar, China is able to guarantee de facto USD demand and pricing terms for many ostensibly HKD-denominated contracts.
SWIFT notes that only 1,900 of its 11,000 international financial institutions even permit the transmission of China’s fiat, whereas over 95% permit USD transfers.
Terminology and currency pegs
As with most things in China’s financial sector, the country’s fiat has various names: renminbi (RMB), Chinese yen (CNY), and yuan (¥). Its central bank, the People’s Bank of China, issues its CBDC that also has several names: digital yuan, digital renminbi, or Digital Currency/Electronic Payment (DCEP).
It’s critical to note that China enforces strict capital controls, prohibiting most investment of mainland Chinese in non-Chinese assets. It severely restricts conversions of mainland yuan into any foreign currency.
Since 2010, China’s government has prohibited its fiat in FX markets to trade outside of a prescribed USD trading range. Although not technically a peg — because the government adjusts these trading bounds periodically — the currency’s value is tightly managed.
China claimed to have abandoned these FX controls in 2021, but markets still believe the currency to be managed in a quasi-peg. Despite ostensibly free FX markets and astroturfed media about goals of attaining reserve currency status, China’s fiat has conveniently not breached its 2010-instituted range of 6 to 7.30 per USD.
Oil: The world’s largest business
China created the “petroyuan” to compete with the “petrodollar” in 2018. The petroyuan has made progress, rising from below 1% of oil trade in 2018 to 13% by 2020. However, the petrodollar still transacts at least five times more oil contracts than the petroyuan today. Substantially all petroyuan oil contracts trade in Shanghai, versus the petrodollar’s global variety of oil exchanges.
More initiatives from the world’s second-largest economy
China has pursued various avenues to increase the renminbi’s standing in global markets. These efforts include the Belt and Road, which aims to increase Chinese access to global ports, railways, and maritime trade. Second, it created an industrial plan to extend its leadership in finished goods called Made in China 2025. Third, China’s CBDC began testing in 2020 — years before other major countries — and the digital yuan remains the world’s largest and most liquid CBDC.
Chinese fiat does seem to be in a good position for growth on the international stage. However, it’s nowhere close to challenging the US dollar for world reserve currency status. Relative to its own, much smaller stature, however, its use is accelerating.