China’s Ambitions for Dedollarization Take Another Step Forward

(Bloomberg) — China’s latest efforts to broaden interest in its onshore currency market show a firm commitment to bolstering the yuan’s global appeal as Beijing works on its approach to chip away at the US dollar’s hegemony.

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Officials this week extended trading hours for the onshore yuan as part of its attempt to increase international use of the currency. Admittedly, it’s a small step, but it follows a push to boost its use in transactions with major energy and commodity exporters and data showing rapid growth in yuan trading activity.

The sheer strength of the dollar in the first half of last year and its weaponization to enforce sanctions on Russia has given fresh impetus to some of the world’s biggest economies to explore ways to circumvent the US currency. While no one is saying the greenback will be dethroned anytime soon from its reign as the principal medium of exchange, experimenting with de-dollarization has increased.

An opening up of markets has long been on the agenda for China’s government. But increased tensions over issues ranging from Taiwan and Russia to semi-conductor technology and trade potentially give an added sense of urgency for leaders in Beijing.

“Beijing is trying hard to keep the yuan relevant as an international currency to counter recent geopolitical tensions and hostile sentiments, especially in the US,” said Stephen Jen, chief executive officer of London-based hedge fund Eurizon SLJ Capital.

The reaffirmation of Chinese President Xi Jinping’s leadership at last year’s five-yearly Communist Party Congress also provides a firmer platform for pursuing progress in market policies, although concerns around the country’s opening up from Covid-mitigation measures could add to challenges.

China this week extended trading hours for the onshore yuan as part of its attempt to increase international use of the currency, meaning that foreign-exchange transactions are now possible until 3 a.m. Beijing time instead of the 11:30 p.m. cutoff that was previously in place. That takes trading into the European evening and much deeper into the US day.

With only a few local banks equipped to take advantage of the new times — which were only announced a few days before — the move was met with a tepid response. On Tuesday — the first day of the extension — only $128 million changed hands during the extra 3.5 hours, around 0.4% of the full day’s volume, according to China Foreign Exchange Trade System. CFETS said 16 banks participated in the extended hours, including spot and derivative markets.

But the shift could, along with other initiatives like encouraging the yuan’s use in commodity transactions, help pave the way for greater use of the currency, which remains more tightly managed than most major peers.

The longer trading hours make it “easier for foreigners” to do business with the country, according to Brown Brothers Harriman & Co.’s New York-based global head of currency strategy Win Thin, who also drew attention to the fact that investments had been flowing out of China.

Data show, for example, that global funds offloaded yuan-denominated government bonds for 10 straight months in 2022 and that the country was on track for its first net outflow since such records began in 2013.

The Chinese yuan trades in distinctly separated offshore and onshore markets — referred to respectively as CNH and CNY. For most international traders, the offshore market is the more critical one, and it has seen major growth in recent years. It trades around the clock and is not subject to the same kind of controls that exist within China itself. This latest move, meanwhile, is focused on the onshore market.

The Bank for International Settlements’ most recent triennial survey of FX trading showed that the yuan as a whole had the fastest growth among 39 currencies it covered. Average daily use jumped to around $526 billion per day, an increase of more than 70% once exchange-rate movements are factored in. That turnover increase was largely driven by trading between counterparties outside mainland China, which doubled between 2019 and 2022 to account for about 80% of all the trades in the currency.

Yuan trading volumes, however, remained low relative to the size of China’s economy – at around 3% of annual gross domestic product – compared with 30% of GDP for the US dollar and 6% for the median emerging-market currency. A separate survey by the BIS last year shows the yuan was involved in 7% of all trades in 2022 compared with the dollar’s 88% as the fifth most traded currency globally.

It also coincides with a push to boost the use of the yuan in transactions with major energy and commodity exporters. Russia, which has tilted more energy sales toward China after the fallout from the war in Ukraine saw it cut off from many of its other customers, has doubled, to 60%, the proportion of its $186.5 billion National Wellbeing Fund that can be held in yuan. And with Saudi Arabia, China last month signed some $50 billion of investment agreements as Xi reinforced ties between the two countries by making a visit to Riyadh.

Having extended yuan trading hours would be supportive of efforts to boost these kinds of transactions with Russia and Saudi Arabia, according to Victor Xing, principal at Kekselias Inc., a portfolio manager and research provider in Pasadena, California.

The yuan rallied to the strongest level in four months after China announced the trading hour extension. The currency has advanced since November as global investors bet on China’s economic recovery following the nation’s Covid policy shift.

“It’s a positive signal for China reopening to the rest of the world,” said Brendan McKenna, a currency strategist at Wells Fargo & Co. in New York. The move is “a signal that China wants more integration into global financial markets than anything else.”

–With assistance from Maria Elena Vizcaino and Wenjin Lv.

(Updates with additional context and yuan trading data.)