e-CNY Caps Yuan Internationalization Push Against Declining USD Dominance – IMF
Rise in China’s process of currency internationalization effort in recent years has been attributed to a slew of steps capped with the introduction of the digital yuan (e-CNY), the International Monetary Funds (IMF) has noted in its latest working paper on the stealth erosion of dollar dominance. The Washington-based international financial institution states that the US dollar share of international reserves declined from 71% to 59% since 2000 and did not translate into an increase in the shares of the GBP, yen, and euro, as would have been expected of these other long-standing reserve currencies and units.
Rather, a quarter of the shift out of dollars has so far been into the Chinese yuan while the remaining three-quarters flowed into currencies of smaller countries that have played a more limited role in the evolution of the international reserve system in the last 20 years, it adds. The paper says the currency internationalization process has been “aided by growing imports and exports, Belt and Road investments, a global network of renminbi currency swaps and official clearing banks, and addition of the renminbi to the Special Drawing Rights (SDR) basket. The capstone on this evolution, it is said, is now issuance by China of a central bank digital currency, the e-CNY.”
With the yuan having the potential to develop into a reputable global reserve currency, according to a professor of clinical finance and business economics at the University of Southern California, Baizhu Chen, the e-CNY stands to gain from the yuan’s growth on the global stage, especially for its cross border attributes. While the use of the e-CNY for cross-border transactions remains a topical issue even as the yuan’s use for payment has risen to a 3.2% market share according to recent data from SWIFT, the CBDC’s wider use across borders would bolster the yuan’s internationalization effort as well as its impact on the US dollar’s dominance.
Chen told Business Insider that should China open up its market and loosen government oversight, countries that feel their economies could be adversely affected by US policies for the dollar’s dominance, or want to diversify their risk, could fall back on the yuan. He expects the yuan to “inevitably expand and play a much bigger role in the world”, particularly in the face of the Western sanctions on Russia’s foreign currency holdings for its invasion of Ukraine.
The IMF also pinpoints that changes in the dollar’s share could also likely be as a result of the preferences and behavior of central banks like the Swiss National Bank and People’s Bank of China (PBoC) which it says have been accumulating substantial reserves in recent years. The institution adds that Chinese reserves rose to more than three trillion dollars noting that a key reason for which China added the yuan to the basket was presumably with the expectation to encourage other countries to hold it as reserves and use it in international transactions.
It concludes, though, that as China overtakes the US in terms of aggregate GDP and volume of international transactions, its results challenge the framing that the yuan is likely to surpass the dollar. “While the renminbi has gained some ground, it remains leagues behind the dollar as a form of international reserves,” the IMF notes.