Digital Yuan: Chinese Currency's Internationalization Goes Full Throttle

China has begun to conduct cross-border crude oil settlements in digital yuan. The China National Petroleum Corporation (CNPC) has recently bought 1 million barrels of crude oil using the nation's digital currency, according to the Chinese press.

The idea of a digital yuan, or renminbi (RMB), formally known as the Digital Currency Electronic Payment (DCEP), was quietly introduced in 2014, with the Chinese authorities keeping silent about the bold project until 2019. Since 2020 the new digital currency has been tested by several Chinese cities. Thus, in October 2020 Shenzhen issued 10 million yuan worth of digital currency to 50,000 random residents who applied to take part in the experiment.

Despite doubts voiced by skeptics about the project's efficacy, Shanghai Petroleum and Natural Gas Exchange (SHPGX) announced on Friday that the China National Petroleum Corporation (CNPC) had completed a deal which envisaged the purchase of 1 million barrels of crude oil with digital RMB. The deal in question was reportedly carried out with the digital yuan wallet provided by the Bank of Communications.

Chinese media quoted Tu Hong, president of the Bank of Communications Shanghai branch, as saying that cross-border yuan settlements could "reduce the reliance on the current international transaction network, further ensure security, lower costs and simplify the transaction process."

"The settlement will promote digital currency cooperation among central banks in various countries, and will greatly accelerate the internationalization of the yuan," said Tu.

Meanwhile, judging from the People's Bank of China's (PBC) Friday report, the RMB's internationalization is going full throttle. From January to September in 2023, the yuan cross-border payments reached a whopping 38.9 trillion yuan, demonstrating a 24% year-on-year hike.

At the same time, the proportion of yuan cross-border payments in the total cross-border payments in both national and foreign currencies for trade of goods was 24.4%, marking a 7% year-on-year increase.

The offshore yuan market is also seeing increased transactions after the PBC inked a standing swap deal with the Hong Kong Monetary Authority in 2022. As a result, the Hong Kong Special Administrative Region (HKSAR) has emerged as the largest offshore yuan business hub in the world, with about 75% of offshore yuan payments being processed there, per the Chinese press.

One should bear in mind that the Chinese yuan joined the International Monetary Fund's (IMF) basket of reserve currencies only seven years ago. Prior to that, China created the Cross-Border Interbank Payments System (CIPS) to facilitate cross-border payments in the national currency.

Eventually, the Chinese currency's global market share leaped from 4% in 2019 to 7% in 2022, making the yuan the fifth most traded currency in the world. For comparison's sake, in 2001 the Chinese currency was ranked 35th.

The unfolding de-dollarization seems to be accelerating the process of the yuan's internationalization. After the West slapped sanctions on Russia over the latter's special military operation in Ukraine, the RMB replaced the US dollar as the most traded currency in Russia in the beginning of 2023. A number of Russian companies, including Rosneft, issued bonds denominated in renminbi. Brazil and Argentina also increased settlements in yuan.

Remarkably, even Western European nations have opted to use the Chinese currency. Thus, China's national energy giant CNOOC and France's TotalEnergies completed their first yuan-settled liquefied natural gas (LNG) deal in March; earlier, in February, it was reported that TESCO, a British supermarket chain, decided to pay its Chinese suppliers in yuan.

Chinese experts draw attention to the fact that the yuan has seen increasing use scenarios and volume of transactions over the past several years. Per them, the yuan internationalization will not only facilitate the growth of China's economy, but also improve the trading efficiency and flexibility of state and non-state actors who use the RMB for settlements.