Could the Chinese yuan be set for a bigger role as Belt and Road investors move away from US dollar risks?

The next phase of the Belt and Road could see more trade, financing and investment deals denominated in the Chinese currency as countries try to avoid the risks associated with the U.S. dollar, observers say.

Ganyi Lui, an international project finance lawyer and head of Vincent Mason’s China offices, said change is likely. “I expect more emphasis on the RMB [belt and road] Investments and financing as partners are looking for ways to mitigate political risk,” he said, using an acronym for the currency’s official Chinese name, the renminbi.

Geopolitical tensions, technology growth and credit stress caused by rising US dollar funding costs could create some inevitable contraction globally and in China as sponsors and investors take time to adjust to the new realities, analysts believe.

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China’s Belt and Road, 10 years

China’s Belt and Road, 10 years

In a Belt and Road white paper released a week before the forum, Beijing revealed that it had signed bilateral currency exchange agreements with 20 partner countries and established yuan-clearing arrangements in 17.

Also, to boost its currency’s international footprint, China has been promoting cross-border issuance of yuan-denominated or „panda” bonds, driven by low yields in the domestic bond market.

The paper noted that its regulators have set up several Belt and Road-themed funds and indices in the eight years since China’s securities industry unveiled a pilot plan for foreign companies to issue yuan-denominated bonds on China’s exchange-traded bond market.

By the end of June, China’s exchange-traded bond market had issued 99 Panda bonds worth a total of 152.54 billion yuan (US$20.9 billion), as well as 46 Belt and Road-themed bonds worth 52.72 billion yuan.

Mark Bohlund, senior credit research analyst at REDD Intelligence, said the shift to Chinese yuan-denominated debt makes sense for Beijing.

The economic situation has now changed as dollar inflows and foreign reserves are very low relative to the size of the Chinese economy. At the same time, China’s relations with the United States have become more strained.

„Many African countries are suffering from a shortage of US dollars as the Federal Reserve has raised rates, long-term yields have risen sharply, and financial flows have shifted back to the US,” Bohlund said.

„China is the main source of imports for most people [belt and road] There is also a rationale for countries to have a greater share of renminbi in their FX reserves,” Bolland added.

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“As the US increasingly weaponises the US dollar through the use of financial sanctions, Africans have a good incentive. [and other] „Countries should reduce their US dollar exposure and shift to renminbi,” the study noted.

Egypt, a new BRICS member with limited access to international capital markets, became the first African economy in May to issue a Panda bond to finance green and social projects, it said. More than 5 percent of Cameroon, Kenya and Tanzania’s foreign debt is already denominated in yuan.

In January, China renegotiated with Saudi Arabia on trading oil in yuan. Brazil, China and Russia — the original BRICS members and the world’s largest commodity and energy exporters and importers — are already working together on payments beyond the yuan border, the study said.

Due to international sanctions, Russia conducts most of its trade with China in yuan. Iran, Venezuela and Indonesia have recently been settling some oil trades with China in yuan, according to BNP Paribas.

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Yun Sun, associate director of the East Asia Program and director of the China Program at the Washington-based Stimson Center, said that if the Chinese use the yuan, the internationalization of the currency would be a goal.

However, „it is not certain that the RMB is very risky, as its exchange rate is not always determined by the market”. Lack of convertibility also hinders its use as a reserve currency, he added.

„There will be many hurdles, but Beijing can use the opportunity to create … an alternative to the dollar exchange system in preparation for contingencies,” Sun said.

According to Rolf Langhammer, a professor at the Kiel Institute for Global Economics, „China will change the direction of its presence in the global South from the real sector. [trade and aid] to the Department of Finance.”

He said it would go beyond using the yuan as an invoicing currency in bilateral trade to make it an attractive transaction currency and a unit of account by convincing partner countries to price their goods in yuan.

„There will be a very significant change if African countries start intra-trade using the RMB,” said Lauren Johnston, associate professor at the Center for China Studies at the University of Sydney.

„They don’t take each other’s coins, but they are happy to use RMB.”

Additional reporting by Kandi Wong