In a further round of sanctions last week, the U.S. blacklisted virtually all of Iran’s financial sector. Perhaps in anticipation, Iran’s central bank announced that it had adopted the yuan (also known as renminbi), as its main foreign reserve currency, replacing the U.S. dollar. With a 25-year strategic partnership with China under discussion, Iran will have a guaranteed market for its oil and gas exports, and with renminbi reserves, it will be able to more easily circumvent SWIFT, the messaging service used by banks around the world for money transfers.
Iran is not the only country to fall foul of a weaponized dollar—Russia, Turkey and Venezuela are also within those ranks. Aggressive U.S. sanctions have given those countries, and traders who wish to do business with them, reasons to find alternative arrangements. In China, too, there is some unease about the dollar’s dominance. The vice chairman of the China Securities Regulatory Commission has said that as long as the country mainly relies on the dollar payment system, it is vulnerable to U.S. sanctions.
China’s policymakers are hoping that the Belt and Road Initiative, its sweeping infrastructure and development scheme, will be one way in which the renminbi can increase its role in international trade contracts and shield deals from fluctuations in the dollar. Central banks around the world are holding more yuan-denominated assets, and many central bank managers see the yuan accounting for 10 to 20 percent of global reserves by 2030, up from its current standing of around 2 percent. What will be worth watching is the currency’s percentage share within particular countries. In terms of overall volumes in global trade, the share may be small, but it would still have implications for China’s geopolitical clout, such as votes at the United Nations.
China’s push to internationalize the yuan is rooted in the 2008 financial crisis. With its substantial dollar reserves, China was overexposed to the dollar’s volatility. The following year, its State Council and six ministries jointly issued measures on pilot projects for renminbi settlement of cross-border trade. Since then, China’s central bank has rolled out a slew of measures to promote further internationalization of its currency.
China announced a steady stream of currency swap agreements with other countries over the past decade, and the number of banks processing payments in yuan is on the rise. China is also working to get the infrastructure in place for trade denominated in yuan, encouraging various regions to join renminbi payment systems.
While countries that have signed on to the Belt and Road may be building their renminbi reserves, in terms of volumes, the actions of big American asset managers may also play a key role in internationalizing China’s currency. Despite bilateral tensions, BlackRock, J.P. Morgan and Vanguard are all expanding their operations in China. Institutional investors have been piling into Chinese government debt because of its high yield, and as one of the few major economies expected to grow this year amid the coronavirus crisis. China’s central bank released draft rules last month easing access to the country’s bond market for foreign institutional investors.
Last year, senior policymakers in Beijing highlighted the specter of financial risk as one of three battles that China must fight—the other two being poverty and pollution. The internationalization of the yuan is a long-term goal. It would make the currency more resilient, and would make trade easier for China. Where Chinese commentators differ is on how to achieve that goal and how to balance opening up the currency with continued financial control. Beijing’s considerations will not just be about financial infrastructure, but what choices people might then make. Loosening capital controls would make it easier for both legitimate businesses and investors, and corrupt officials, to move money outside the country.
China is far from being able to wield financial sanctions with the same aplomb as the United States. But Iran’s adoption of the yuan looks like another step in what will be a decades-long process of the currency taking on a more prominent international role, according to China’s goals. The yuan might not replace the dollar, but it will become a more important currency, especially in emerging markets and in countries under American sanctions.