China’s Currency Clout
The RMB is currently the fourth-most traded currency on the global market (behind the dollar, euro, and pound). It now holds the third highest percentage in the basket, at just under 11 percent, placing it ahead of the pound’s 8 percent (though far below the dollar, which holds more than 40 percent). The IMF’s decision to include the RMB is more than a symbolic sign of the currency’s liberalization: It’s also a big step toward the RMB’s regular usage outside of China. The SDR determines the mix of currencies in which the IMF lends out — a total of $112 billion in 2015 — and the RMB’s inclusion in this distribution mechanism will likely drive up the currency’s demand. The comfort level of the RMB’s usage in global transactions among central banks, sovereign wealth funds, and other massive financial institutions will rise with the currency’s greater accessibility.
The RMB has already begun making its mark outside of China. It is becoming a currency of choice for several industries, including the Australian mining and Russian oil sectors: In 2015, the Russian gas giant Gazprom, under U.S. and EU sanctions for Moscow’s support of pro-Russian separatists in Ukraine, began shipping oil to China via RMB transactions — coinciding with a larger shift by Moscow to move away from the dollar and the Western financial system. And Australian mining companies have found that handling transactions in RMB with their Chinese counterparts gives them a competitive advantage over their global rivals.
During British Chancellor of the Exchequer George Osborne’s September visit last year to Beijing, China’s central bank announced it would begin issuing short-term bonds in London. The intention? Making London theworld leader in offshore RMB trading. When German Chancellor Angela Merkel visited Beijing in October, she signed a partnership with Chinese Premier Li Keqiang to form the China Europe International Exchange (CEINEX), the first trading platform outside of mainland China for RMB-denominated bonds and exchange-traded funds. With plans for trading in Europe’s two major financial hubs, the RMB is taking a further step from a regional currency to a coveted global one. By the end of 2015, roughly 2.5 percent of global financial transactions used the RMB, up from about 1.5 percent in June 2014. And that number will keep increasing.
But this legitimacy has a downside: the potential to weaken dollar-driven U.S. secondary sanctions — penalties on institutions that help sanctioned actors evade restrictions. Over the last 15 years, both the United States and the EU have increasingly relied on sanctions as an alternative to military force, especially in cases involving state-sponsored terrorism, money laundering, human rights abuses, and border disputes. Since the 1944 Bretton Woods conference, the dollar has been the leading currency for most global financial transactions: The restriction of its usage is what gives secondary sanctions their teeth. Restricting access to the dollar is a threat to a country or institution’s bottom line — and in some cases, bars them from some of the most basic day-to-day transactions.
In 2014, for example, the United States fined the French bank BNP Paribas $8.9 billion for, among other reasons, processing financial transactions on behalf of sanctioned entities in Sudan, Cuba, and Iran. The penalty did not end there: Washington also barred BNP Paribas from clearing dollar transactions for one year, which greatly harmed its business operations and its client relationships. But if the RMB had been a legitimate alternate global currency for BNP Paribas, the effect U.S. sanctions would have had on their balance sheets would have been limited, and their ability to do business with blacklisted countries could have continued. In an international financial system more accepting of the RMB, sanctioned entities would be able to far more swiftly carry out deals in that currency than on the black market.
China certainly has an interest not to be seen as the banker of choice for rogue actors. Still, the overall weakening of U.S. financial sanctions is inevitable. The United States needs to prepare for a world in which the threat of Western financial sanctions begins to ring hollow. As a first step, the United States should utilize the annual bilateral Strategic and Economic Dialogue’s economic track as an opportunity to raise concerns with China about potential undermining of U.S. policy objectives on sanctions. While a common understanding on the issue is unlikely, there should at least be an agreement on regular consultations between the two countries on sanctions.
Second, the United States and the EU should hold multilateral talks with China to propose common standards between the widely used Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system and the newly minted Cross-border Interbank Payment System (CIPS). SWIFT, based in Belgium, is currently the gold-standard network for international payments transfers, used by more than 10,000 financial institutions around the world. Restriction from the system can affect everything from citizen-to-citizen interbank transfers to foreign exchange transactions. Prior to the Iran nuclear deal, the EU restricted Iranian financial institutions’ use of SWIFT, greatly limiting their access to much of the world’s financial networks. CIPS, created by China in 2015, serves as a SWIFT alternative that processes global RMB transactions. Just several dozen financial institutions currently use CIPS — mostly in China — but CIPS could become the payments system of choice for human rights violators, nations with sanctioned companies, and Western-designated terrorist organizations.
If Beijing resists dialogue, the West should use international forums like the U.N. Security Council, the G‑20, and the World Economic Forum to tie China to the very entities using the RMB for money laundering, terrorist financing, or other violations of international law.
A “state sponsor of terrorism” or “blood money” tag is not in China’s best interest. If there’s a unified effort, China-led systems like CIPS could lose credibility before they even have a chance to get off the ground. Still, achieving this coordination in the short term is unlikely. Meanwhile, the RMB will continue to grow more and more popular.
BNP Paribas, the bank once fined for violating U.S. sanctions, is preparing for the advent of the multicurrency world. One of the bank’s recent ad campaigns read, “Renminbi on its way to acquiring a global status,” and it touted an award it won from the financial publication Asia Risk calling it the “Renminbi House of the Year.” BNP Paribas is ready. Is Washington?
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This commentary originally appeared in Foreign Policy on March 18, 2016.