Yuan becoming an international currency a necessary condition to maintain world peace
Published: Feb 28, 2023 11:30 PM
Chinese yuan Photo:VCG

Chinese yuan Photo:VCG

War is a way of pursuing national interests. It can only be avoided if the costs are greater than the benefits. In the contemporary environment of great power competition, China needs three necessary conditions to maintain a peaceful external development environment: first, the economic growth should be relatively strong; second, the military must not lag behind; third, the yuan needs to become an international currency.

The current global economic landscape is mainly shaped by three powers - the US, EU, and China, but the international monetary system is dominated by the US dollar. While the status of the US dollar is superior to the economic strength of the US, yuan's status is less than the real economic strength of China. In 2022, China's gross domestic product (GDP) accounted for more than 18 percent of the global economy, but yuan only accounted for less than 3 percent of global foreign exchange reserves. The internationalization of the yuan holds great potential.

The international currency status of the US dollar is the basic competitiveness of the US economy that is still ahead of the Chinese economy. The faster the Chinese economy develops relative to the US, the greater the gap between the US dollar and the US economic strength, and the more likely the US will wage wars, creating turmoil to protect the dollar and the US economy.

As US dollar assets are the only secure assets in the world, global capital will flow to US dollar assets as soon as geopolitical conflicts break out. The US economy benefits from the turmoil, while the Chinese economy suffered the effects of the war. Therefore, in order to prevent war and strive for peace, yuan must become an international currency, a safe asset that competes and coexist with the US dollar and break the dominance of the US dollar.

Despite the complex and severe international political and economic situation caused by the combination of the COVID-19 pandemic and geopolitical conflicts in recent years, the pace of yuan internationalization has been steady and positive progress has been made. With the further deepening of the reform and opening-up of China's financial market, the status of the yuan in the global financial market will continue to improve, and the international functions of the currency will continue to expand and strengthen.

The status of the yuan as an international reserve currency is continually being reinforced. According to the Currency Composition of Official Foreign Exchange Reserves data released by the IMF, in the third quarter of 2022, the proportion of yuan in global foreign exchange reserves was 2.76 percent, ranking fifth-largest in the world. Last year, the IMF also increased the weight of the yuan in the Special Drawing Rights (SDR) currency basket from 10.92 percent to 12.28 percent, reflecting the international community's recognition of China's continuous promotion of financial opening-up. 

With the support of China's massive volume of imports and exports, cross-border payment of the yuan payment has also made great strides. The latest data from the State Administration of Foreign Exchange shows that in 2022, the foreign exchange hedging ratio of enterprises was 24 percent, an increase of 11 percentage points compared with 2016. Meanwhile, yuan payments accounted for nearly 50 percent of China's cross-border payments, an increase of more than 20 percentage points compared to 2016.

Although the dominance of the American dollar in the international market is temporarily unshakable, the progress of internationalization of yuan still has the latecomer advantage. When there is a sudden technological change in an international monetary system, the US dollar, which is relatively advanced in the existing system and existing technology, will be more burdened and the opportunity cost of changing the track will be higher; on the contrary, yuan, as a latecomer, embraces great opportunities to transcend.

In the competition between the yuan and the US dollar in the international monetary system, it is necessary for China to create and seize the opportunities coming with the sudden technological change in the international monetary system. At the summit of these changes are the innovation of monetary policy and the digital technology of the international currency.

Yuan becoming an international currency will also have a positive impact on every aspect of life in the US. The yuan's transformation toward an international currency is only a change more adapted to the global economic landscape that is shaped by three powers - the US, EU, and China.

It can help the US overcome the stubborn problem of excessive financialization and help boost the real economy of the US. Therefore, the benefits will outweigh the disadvantages for the American people and the US economy.

The author is chair professor at PBC School of Finance in Tsinghua University, director of Center for International Finance and Economic Research.