Egan-Jones Ratings Company recently released an updated risk commentary in a newsletter for China in light of increasing yuan-denominated transactions in global markets. Despite current political tensions between China and many countries, including the U.S., Egan-Jones views the longer-term outlook for China as an optimistic one on the likelihood that China will step more fully into its role as a global citizen.
China’s yuan, a unit of its currency, the renminbi, currently makes up about 3% of global trade, while the U.S. dollar has a 41% share, but increasing transactions in the yuan could be favorable for China’s currency to continue to gain strength.
“The adoption of the Chinese currency has been gaining traction lately, as Russia has shifted towards yuan-based trading in response to Western sanctions on its exports, imports, and energy transactions,” Egan-Jones wrote.
Alongside Russia’s increasing transactions with China and the yuan becoming a reserve currency in Russia, China has been pushing for the yuan to be used internationally in the energy industry: France completed its inaugural LNG purchase from the UAE denominated in yuan and completed on the Shanghai Petroleum and Natural Gas Exchange for 65,000 tons.
China has also recently signed trade agreements with Brazil that will result in some trade between the two countries being completed in their native currencies, a further boost to the yuan in a more multipolar world looking to move away from the outsized impacts of the U.S. dollar.
All of it is part of a push by China’s government to establish the yuan as a global reserve currency: last July the People’s Bank of China along with Hong Kong, Malaysia, Indonesia, Singapore, and Chile and the Bank for Intentional Settlements established the Renminbi Liquidity Arrangement that collectively holds 15 billion yuan in reserve ($2.2 billion USD), reported MoneyWise.
“Our view is that China has and will continue to experience bumps, but over the longer term will determine that it is optimal to be a decent global citizen,” Egan-Jones wrote of China’s outlook. “We are rather optimistic and that over time, overall conditions continue to improve and that some sort of accommodation is reached.”
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China’s economy continues to bounce back this year but many of the benefits could remain within China’s borders, a notoriously challenging place for foreign investors to gain access to.
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