China Turns to BRICS to Globalize Yuan

China Turns to BRICS to Globalize Yuan

For more than three years, China has been gradually implementing a strategic plan to internationalize its currency, the yuan, with a central element of this strategy being to increase the yuan’s role in China’s cross-border trade settlement. To date, these efforts have been strikingly effective, as the “people’s currency” was used to settle nearly 10 percent of China’s international trade in 2011, up from essentially zero in 2009.

Last week, it was reported that China is poised to take another significant step in promoting the yuan’s use in global trade settlement by extending yuan-denominated loans to the other BRICS nations: Brazil, Russia, India and South Africa. The details on the arrangement are still fuzzy, but from what we do know, the money is slated to come from the China Development Bank (CDB), which will reportedly sign an official agreement on the matter when the BRICS meet in New Delhi at the end of this month. Additionally, the remaining BRICS nations are said to be preparing similar loans via their own development banks, which will be offered in their national currencies to the other members, though these agreements are fundamentally about access to yuan financing.

If this is indeed how things play out, these moves amount to a local-currency lending network among the BRICS that will make it much easier for trade within the group to be settled in domestic currencies rather than relying on a third-party currency, such as the dollar or the euro. For instance, an importer in Brazil will now be able to acquire yuan from Brazil’s development bank, BNDES, to purchase goods from a Chinese enterprise. Or, alternatively, an Indian exporter will be able to sell its goods to a Russian importer and accept rupees as payment, rather than dollars.

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