Will the renminbi soon dethrone the dollar?

The G20 summit is an excellent opportunity for Chinese Prime Minister Xi Jinping to dust off international ambitions after more than two years of domestic problems. The country wants to do more business through its own payment systems and in its own currency. That plays into the hands of the renminbi.

In foreign exchange markets, the sharp slide of the dollar is demanding a great deal of attention. After better-than-expected US inflation data, the currency has fallen sharply against almost all other currencies. It was about time, by the way, because in the previous twelve months the dollar was almost unstoppable. The exchange rate gain against the euro even amounted to more than 20% during that period. Emerging countries in particular suffered greatly from the expensive dollar. In local currency terms, they spend more on all imports traded in the US currency and on interest payments and repayments on dollar loans. Argentina, Ethiopia, Ghana and El Salvador, among others, have run into serious problems as a result.

Import dollar-free
This pain is an excellent opportunity for China to significantly increase the renminbi's sphere of influence. A few years ago, this was even a strategic objective within the Chinese Communist Party. While the country is no longer aiming to overthrow the dollar, it is inevitable that the renminbi will play a greater role in currency markets. According to the British think tank Enodo Economics, China is working towards a situation in which it can buy everything it needs from other countries, paying in its own currency via its own payment systems. At the moment, this is still very often done in dollars. No less than 85% of all currency transactions worldwide still take place in the US currency.

Prefer to do business in renminbi
The dollar pain of the past year has significantly lowered the threshold for emerging countries to do more business in renminbi. It helps that since 2013, China has been investing tens of billions every year in infrastructure projects in Africa, Asia and Eastern Europe, among others, as part of the so-called New Silk Road. In recent times, however, those investments have been on the back burner. Domestic developments absorbed a lot of attention from Jinping and his party. Getting the corona pandemic under control in particular took a lot of effort. As part of the zero-Covid policy, lockdowns are still in place in some cities and areas. In addition, Jinping had his hands full securing a new presidential term at the party congress held in October.

Room to move instead of strength
The way in which Jinping has attracted attention at the G20 summit indicates that his focus is now shifting to the international stage. He spoke at length with US President Joe Biden and rebuked Justin Trudeau after his Canadian colleague leaked the contents of a mutual conversation to the press. China thus reinforces its geopolitical policy with strong words. But a greater role for the renminbi does not have to be shaped by a more powerful, more expensive currency. Instead, there is a good chance that the country will give the renminbi more room to maneuver against the dollar. And incidentally, there has been little sign of strength lately: against the euro, the Chinese currency recently reached its lowest rate of the year.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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