China's challenge of the dollar mixed news for Korea

Chinese yuan is inspected at Hana Bank’s Counterfeit Notes Response Center in Jung District, central Seoul, on Aug. 22. [NEWS1]

China and a number of other countries are pushing for de-dollarization, in the process making the yuan the fourth most actively traded currency.

It will be challenging to match the dollar as an anchor currency any time soon, according to economists, but the de-dollarization movement in some countries and China's ambition to globalize the yuan to gain bargaining power in cross-border trade are contributing to the international usage of the country's currency.

The yuan hit an all-time high of 4.61 percent of global payments in November, data from the Society for Worldwide Interbank Financial Telecommunication (Swift) system showed.

Global payments are predominantly handled by the Swift system, which is overseen by the central banks of G-10 countries, including the United States, Belgium and France. Sanctions that bar the use of the Swift network hinder trade and damage the economies of the countries affected by them.

The yuan overtook the Japanese yen to rank fourth for global payments, after the dollar's 47.08 percent share, the euro's 22.95 percent and the pound's 7.15 percent.

China's currency became the most traded on the Moscow Exchange last year, with a 42 percent share, beating the dollar's 39.5 percent, Russia's Kommersant Daily reported in January.

Moscow's pursuit of de-dollarization gained momentum after the West levied heavy sanctions on its financial system following Russia's invasion of Ukraine in 2022.

"Making payment just using the dollar is a risk for countries that are not close with the United States," said Lee Jeong-hwan, an associate professor at Hanyang University's College of Economics and Finance.

Countries sanctioned by the United States get cut off from the cross-border payment networks, harming the trade and the economic performance of these countries.

"Payments via the yuan are becoming more prevalent centered in those countries."

Other currency-war battlegrounds where China is gaining ground include Argentina and Brazil.

The Argentine government said last April it will pay for Chinese imports in yuan instead of dollars, saying that would bring more "freedom" for the country and strengthen its reserves. Last April, China and Brazil reached a deal to trade in their own currencies, without the need of an intermediary currency like the dollar.

Some African countries like Egypt are raising yuan-denominated bonds, another sign of internationalization. China's low borrowing costs for offshore issuers raised the appeal of "panda" bonds, which are issued by overseas institutions in the Chinese onshore market.

In 2022, 1.6 percent of Korea's exports were denominated in yuan, making it the No. 5 trade currency. The dollar in No. 1, at 85 percent, followed by the euro (5.8 percent), the yen (2.3 percent and the won (2.3 percent), according to Bank of Korea data.

In 2021, 2.0 percent of Korean trade was conducted in yuan.

Greater use of the yuan internationally could increase won volatility.

"Internationalization of the yuan could make Korea more dependent on the movement of yuan," said an economist at a financial research center.

"China's capital account isn't fully liberalized, making the renminbi difficult to sell in the international market and thereby making the Korean won its proxy currency. So internationalization of the yuan could add volatility to the value of won by the movement of the neighboring countries and their use of the yuan."

It could be beneficial to the Korean economy, at least in the near term.

"A rise in demand for the yuan, which will push up its value, could raise Korea's export competitiveness on competing products in a short run," said Lee Hyung-suk, an economist at Hyundai Research Institute.

"But increased liquidity of the yuan in the foreign exchange market may add volatility to the Chinese economy, which could lead to a joint appreciation of the Korean won in the mid to long run as its proxy currency, offsetting the short-term export benefits."

China has been striving to break away from the dollar-dominated financial system.

The country announced in 2022 it would extend interbank foreign exchange market trading hours to cover more trading sessions in Asian, European and North American markets. In 2015, China established the Cross-Border Interbank Payment System (CIPS) clearing and settlement services system for cross-border renminbi payments and trade to facilitate the use of the currency globally.

China's strong push for a central bank digital currency (CBDC) is another element of its strategy. The country has been working on its digital currency since 2014 and became the first major economy to establish a large-scale pilot, with a CBDC in major cities in 2019.

"In order to challenge the dollar's hegemony and internationalize its currency, China will have to move away not just from the dollar but also from the payment rails dominated by the dollar," said a 2021 report titled "China's Digital Yuan: an Alternative to the Dollar-Denominated Financial System" by the Carnegie Endowment for International Peace, a Washington-based think tank.

"The best way to simultaneously do both would be to introduce a new payment rail like CBDCs. China's ability to successfully promote its currency using CBDCs will depend heavily on the country's ability to relax capital controls and maintain the world's trust in its institutions," the report said.

"Prevalent usage of the network will help China and its allies reduce reliance on the Swift network," Prof. Lee said.

Transactions using China's digital yuan broke 1.8 trillion yuan ($250 billion) at the end of June last year, according to the country's central bank, marking a jump from about 100 billion yuan as of August a year earlier.

With China's slowing growth and a continued advancement of the Swift system, like enabling payments to be executed in less than a minute, "China's attempt at turning yuan into an anchor currency has lately become pitiful," said Kim Hyoung-joong, a professor at Korea University School of Cybersecurity.

BY JIN MIN-JI [jin.minji@joongang.co.kr]