Recently, against the backdrop of the Federal Reserve's interest rate hikes, increased volatility of the U.S. dollar (USD), and the use of the USD-based settlement system by the West in imposing sanctions on other nations, there have been some developments in the internationalization of the Chinese yuan or renminbi (RMB). Following China's efforts to establish an RMB-trade settlement system with Brazil, the Argentine Ministry of Economy announced on June 30 that the Argentine government had used Special Drawing Rights (SDRs) and RMB to repay USD 2.7 billion in maturing debt to the International Monetary Fund (IMF). This marked the first time Argentina used the RMB to repay its debt. The Argentine Ministry of Economy stated that approximately USD 1.7 billion of the payment was made using SDRs, while the remaining portion (about USD 1 billion) was paid in RMB. According to Argentine news agency América Economía, the country’s government plans to send a delegation to the IMF headquarters next week to negotiate further debt repayment arrangements.
Whether it is the use of SDRs or direct payment in RMB, this signifies that the Chinese currency's usage and transactions are starting to take place among third parties and are gaining recognition and endorsement from international financial institutions. For the internationalization of the RMB, this new development represents a breakthrough. Moreover, if Argentina continues to repay its IMF debt in RMB, this transaction will become a regular occurrence rather than a one-time exception. This breakthrough positions the RMB as a new anchor currency.
For Argentina, obtaining RMB through trade and central bank swaps and then converting it into USD to repay dollar-denominated debt can be seen as a compromise and choice made in a situation where there is a severe shortage of USD and an inability to repay substantial debt. As part of this exchange, the Argentine government announced on April 26 that it would use RMB for settlement in imports from China. According to Bloomberg on June 23, the Argentine customs agency reported that over 500 Argentine companies have requested to pay for imported goods in RMB, including electronics, automotive components, textile manufacturers, as well as oil and mining companies. The Argentine central bank also stated that officials have approved RMB imports equivalent to around USD 2.9 billion. In the first ten days of June, the total volume of RMB transactions in the Argentine currency market reached approximately USD 285 million, which is twice the volume of May's transactions. Additionally, data from Mercado Abierto Electrónico indicates that the share of RMB transactions in the Argentine foreign exchange market reached a record high of 28% in a single day, compared to 5% the previous month. This indicates that the country will further strengthen its trade and investment ties with China using RMB as the settlement currency. On June 26, the Argentine National Securities Commission approved the issuance of securities products settled in RMB in the local market. The entry of RMB into Argentina as a settlement and investment currency, as well as the repayment of USD debt with RMB by the Argentine government, demonstrates that the internationalization of the RMB has expanded beyond bilateral trade and investment activities between China and other countries to include third-party international transactions and domestic markets. This represents a breakthrough in expanding the international influence of the RMB and promoting its international use.
Although Argentina, in the face of massive dollar debt, has resorted to using RMB as a means to indirectly repay its obligations, its choice of a third-party currency is strategic and built upon deepening economic and trade ties with China. Recently, the People's Bank of China (PBoC) and the Central Bank of Argentina renewed their bilateral currency swap agreement, with a swap scale of RMB 130 billion RMB/ARS 4.5 trillion, valid for a period of three years. In terms of bilateral trade, China is Argentina's second-largest trading partner, second only to Brazil, and the second-largest export destination for Argentine goods. According to data from the Argentine Ministry of Economy, in April and May of this year, Argentina settled imports from China worth USD 2.721 billion using RMB. The value of imports settled in RMB accounted for 19% of Argentina's total imports in these two months. The Argentine Ministry of Economy stated that after reaching agreements with different companies, Argentina will use RMB to pay for Chinese imports worth approximately USD 1.04 billion this month. The use of RMB will expedite the pace of Argentina's future imports of Chinese goods over the coming months, and the efficiency of the authorized transactions will be higher. Bypassing direct settlement in USD in bilateral trade is also advantageous for businesses to avoid exchange rate risks, while also avoiding disruptions caused by fluctuations in the USD for both parties.
In addition to Argentina, on June 12, Pakistan also announced its first payment for imported Russian crude oil in RMB. This can be seen as a step forward in third-party RMB settlement for international oil transactions. For Russia, which faces sanctions from the USD system, and Pakistan, which is burdened with debt, it can be seen as a mutually beneficial arrangement. Russia can obtain a relatively stable third-party currency, while Pakistan can secure affordable oil supplies while avoiding sanctions. These developments highlight the advantages of RMB internationalization at present.
As the use of RMB in third-party transactions takes on a new meaning as an "anchor currency," this accelerates the expansion of RMB internationalization and has positive implications for the stability of RMB exchange rates and the expansion of the currency's geopolitical influence. However, according to researchers at ANBOUND, this development may also have an impact on China's domestic economy and policies, potentially leading to counter-effects. When holders of RMB use it to exchange for other currencies to conduct trade or repay foreign currency debts, it ultimately depletes China's foreign exchange reserves. This indicates that there are practical limitations to the internationalization of the Chinese RMB, which is linked to China's other foreign exchange reserves. Moreover, this poses challenges to the stability of the RMB's exchange rate.
On one hand, the increase in the Chinese yuan’s third-party transactions implies that the offshore RMB market is bound to expand further. This has implications for the RMB exchange rate, as it means a decrease in the effectiveness and influence of the PBoC's policies. Since these third-party transactions do not involve Chinese market entities, China's financial regulatory authorities are unable to monitor them. The fluctuations in offshore RMB exchange rates are more market-oriented in nature. This can pose constraints on the implementation of the central bank's monetary policies, thereby affecting the role and impact of macro policies on China’s domestic economy. The recent abnormal volatility in offshore RMB exchange rates may be a consequence of third parties selling RMB and purchasing dollars to repay debts. From China's perspective, there have been minimal changes in the trade and capital accounts, indicating a lack of basis for RMB depreciation.
On the other hand, in the mechanism of central bank currency swaps, if the use of RMB for trade and investment by the other country within China continues to increase, it may lead to inflationary threats to the Chinese economy, despite the positive aspect of increasing domestic demand. Moreover, in situations where the local currency is unstable, these currency swaps themselves can be considered overseas aid by China in the form of RMB to other countries. This means that as the RMB expands its geopolitical influence, it will inevitably incur certain short-term economic costs.
Despite the significant progress in the internationalization of the RMB and its emerging role as an anchor currency, there are also numerous challenges and risks associated with its development. Therefore, ANBOUND researchers maintain their previous stance that the international use of the RMB should be grounded in real trade and investment demand, emphasizing the importance of a practical and realistic approach rather than setting overly ambitious goals. The internationalization of the RMB should continue to follow a geographically focused path, while concurrently taking advantage of opportunities and implementing regulatory and policy adjustments that align with the expansion, ensuring coherence among various policies. This approach allows all stakeholders, including China, to reap the benefits of RMB expansion while mitigating significant fluctuations in the offshore RMB market, potential exchange rate volatility, and any potential impacts on the economy and politics.
Final analysis conclusion:
Argentina's repayment of its IMF debt in RMB signifies a significant advancement and the initial features of the RMB serving as an international anchor currency. However, there is still a considerable journey ahead before the RMB can become a stable global currency anchor. The internationalization of the RMB not only enhances China's economic and financial influence but also introduces various new challenges and risks. In this regard, it is crucial for the Chinese authorities to adopt a comprehensive and systematic approach in its overall policies.
