China Talks Alternative Financial Infrastructure as Digital Yuan Rollout Nears

China’s rumoured plan to ditch the U.S. dollar as its main currency for trade settlements may be about to be realized. China and Russia say they have agreed to speed up work on running an independent trade network that would enable their respective economies to rely less on the U.S.-led international financial system.

Chinese President Xi Jinping and his Russian counterpart Vladimir Putin in a video call on Wednesday reportedly noted the need to accelerate “efforts on the formation of independent financial infrastructure for servicing trading operations between Russia and China” without third countries’ influence. 

No further details have been released about the alternative network in development but its take-off could limit the two countries’ access to international payments mechanisms such as SWIFT. The SWIFT system provides secure financial messaging services across 11,000+ banking and securities organisations, market infrastructures and corporate customers in over 200 countries and territories. SWIFT’s financial flows of all international cross-border transactions as at 2014 show the U.S. dollar ranks first with a worldwide usage share of 51.9% followed by the euro (33%) and the British pound (5.4%). 

In particular, China having to do less with the SWIFT system could see the world’s second-largest economy’s currency get a boost should other countries choose to accept the yuan as an official settlement currency for border trade with China like Myanmar recently did. 

The use of the yuan in Myanmar is to be the first phase of a cross border trade pilot programme. At a time when the U.S. dollar is being used to impose sanctions on countries, insiders say the yuan’s choice could serve to break the U.S. dollar’s grip on Myanmar’s foreign currency reserves. 

Aside from its coming as the yuan is strengthened against the U.S. dollar, the timing of the China-Russia announcement is also significant considering it’s barely two months until the public rollout of China’s much-awaited digital yuan. 

Having been in the pilot phase for about two years, the planned release and wider use of the central bank digital currency have been speculated to be a way for China to internationalise the yuan and challenge the dominance of the dollar. 

The People’s Bank of China (PBoC)’s introduction of the digital yuan is meant to create a competition with other digital currencies like Bitcoin and reshape China’s current payment system by providing a cash-like digital payment method. But its use in cross border trades, especially across regional blocs like the 142 Belt and Road Initiative member countries, could pose even a greater challenge for the U.S. dollar dominance. 

Meanwhile, China has always maintained that the digital yuan is for domestic use and that its use for cross border purposes is not a priority at the moment. The PBoC has partnered with other central banks including on the “Multiple CBDC Bridge” project which is specifically designed for making real-time cross-border digital currency transactions. The digital yuan was also recently linked with Hong Kong’s Faster Payment System as a way to make cross border payments easier. Yet, the PBoC’s whitepaper says the digital yuan is for domestic use. 

The yuan is currently at a 6-month high having gained 2.5% so far this year even as its deposits in local banks rose 0.26% to CNY236.03 billion (US$37.08 billion) in November following a three straight months of decline. There are suggestions that the PBoC has grown intolerant of the yuan’s strength and is bent on slowing it down as it buys foreign exchange from banks and more quotas for outbound investments.