A dollar alternative

Published July 10, 2023

In June, Pakistan used China’s currency to pay Russia for a 100,000-tonne discounted crude oil purchase. That was a first: Islamabad has never used yuan before to settle cross-border trade transactions with a third country, although it has invoiced part of its Chinese imports in Renminbi (RMB) for the last several years.

The development signifies Pak­istan’s increasing reliance on Beijing as it faces a crippling balance of payment crisis and is strapped for dollars to pay the bill for its surging international purchases, especially fuel.

“Use of yuan to import Russian oil underscores an emergency situation for Pakistan, with its dollar reserves dwindling to cover less than a month of its imports,” noted a senior State Bank of Pakistan (SBP) official, speaking on condition of anonymity because he’s not authorised to give public statements.

“But for China, it’s of strategic importance as Beijing pushes to boost global utilisation of RMB as a credible, stable alternative to the dollar.”

For years, the growing use of RMB for bilateral trade with China — the biggest source of foreign direct investment and the largest trading partner of Pakistan for the last several years — has provided a huge relief to dollar-stressed Pakistan by reducing its reliance on the American currency.

A growing number of countries are seeking refuge in stable currencies like the yuan and forging regional trade alliances

Pakistan has conducted part of its annual goods and services trade with Beijing — the bilateral trade, according to the UN Comtrade database, increased to $26 billion in 2022 — in Chinese currency to the tune of CN¥30bn in FY21 under a Currency Swap Arrangement (CSA).

This signifies Pakistan’s dependence on the greenback is down by $4.5bn a year, easing pressure on its plummeting foreign exchange reserves amid a deteriorating external account crisis.

The scarcity of dollars isn’t making only Pakistan turn to the yuan to pay for its imports; several other dollar-stressed economies are also leaning on RMB for rescue.

In April, Argentina said it’d start to pay for Chinese imports in yuan rather than dollars to protect its diminishing dollar reserves. Bloomberg recently cited Argentina’s customs, showing over 500 firms had requested to pay for imports in yuan. The import payments in RMB equivalent to $2.9bn have been authorised.

In the first 10 days of June, yuan transactions in Argentina’s currency market had doubled, roughly to $285m compared to all of May.

But not everyone is adopting the yuan due to economic stresses or dollar scarcity. Countries are turning to the yuan for diverse reasons. Moscow, for example, has done so after the West, led by the US, slapped sanctions, froze its assets, and expelled its banks from the SWIFT payments system in the wake of the Ukraine crisis.

The majority of countries using the yuan are grappling with their own economic distress or looking to trade with Russia despite sanctions or trying to enhance trade with China.

Some smaller economies are moving away from the dollar since a recent surge in the dollar’s value has placed a massive burden on them by weakening their national currencies, making their foreign debt repayments costlier, and rendering essential fuel and food imports exorbitantly expensive.

No wonder a growing number of countries are seeking refuge in stable, alternative currencies like the yuan and forging regional trade alliances in local currencies.

Whatever the reason, the yuan is gaining traction as a currency of choice for international trade, national forex reserves, and investment as countries and regions like India, Argentina, Brazil, South Africa, the Middle East and Southeast Asia step up efforts aimed at reducing their reliance on the dollar.

China’s currency is slowly but surely being adopted for more international payments, which, analysts say, could lay the foundations for a trading system parallel to the dominant dollar.

In December last year, China and Saudi Arabia carried out their first transaction in yuan. Iraq and Bangladesh have announced plans to allow the settlement of trade with China directly in the yuan. In March, a French firm accepted payment in yuan for 65,000 tonnes of LNG.

Beijing has paid in its own currency for LNG procured from the UAE as it urged suppliers in the Middle East to accept RMB rather than the dollar in oil trades. China and Brazil have reached a deal to trade in their own currencies.

The International Monetary Fund data suggests that the world is slowly but surely moving away from the dollar and adopting the RMB. It estimates that the greenback’s weight in the countries’ foreign exchange reserves has decreased from 71 per cent in 2000 to 59pc followed by the euro at 20pc.

Although Renminbi constitutes less than 3pc of forex reserves, it has been the fastest-growing reserve currency around the globe since 2016. Russia is storing all its oil and gas surplus revenue in 2023 in RMB as a shield against sanctions, with the yuan becoming the second-largest currency in Brazil’s foreign reserves at the end of March.

The use of yuan rose to 2.37pc of global payments in November last year, up from 2.13pc the previous month, remaining the fifth most active currency, according to the SWIFT data. Standard Chartered Renminbi Globalisation Index (RGI) jumped to 26.6pc last year, topping the 18.5pc growth recorded in 2021.

It quoted a People’s Bank of China February report that China settled CN¥42.1 trillion ($6.1tr) worth of its cross-border payments and receipts in the RMB last year, up from CN¥9.2tr in 2017. The share of yuan settlements in China’s total value of goods trade and foreign direct investment has reached new highs of nearly 20pc and 70pc, respectively.

“The world is surely moving away from a dollar-dominated global financial system to a more inclusive multilateral world as reflected by the falling share of the greenback in reserves,” argues Fahad Rauf, head of research at the Ismail Iqbal Securities.

“But it’s too early to say that the yuan will dethrone the dollar any time soon. Such an eventuality requires more countries to pay one another in yuan for larger amounts of trade that don’t involve China, the world’s top exporter and second-largest importer. That’ll take time — a very long time. But yuan will be the main beneficiary of the growing phenomenon of the world moving away from the dollar-dominated financial system,” said Mr Rauf.

Zhou Rong, senior researcher at Chongyang Institute for Financial Studies, Renmin University of China, agrees with him. “More and more countries are likely to use yuan. But I don’t believe it is going to replace the dollar,” he argues. “China’s policy is more inclusive rather than exclusive.”

His argument implies that Beijing is just aspiring for an ‘inclusive’ world financial system where its yuan can coexist with the dollar and other global currencies.

With a large number of countries weaning away from the dollar for international payments in search of financial stability, the yuan is likely to play a bigger role in global payment and settlement, foreign exchange reserves, investment and financing in the future.

Pakistan being part of the China-Pakistan Economic Corridor, the flagship project of the Belt and Road Initiative, is in an advantageous position to gain a lot from this shift in the global financial system — no matter how small it appears at the moment.

For that, insists former investment minister Haroon Sharif, “We must rapidly woo large investments, especially through relocation of Chinese industry in the country, to increase our exports to China to bridge the massive trade deficit (of nearly $20bn) with Beijing.”

Published in Dawn, The Business and Finance Weekly, July 10th, 2023

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