China’s RMB isn’t set to outpace the dollar in Latin America…yet

In recent months, Brazil and Argentina announced plans to expand bilateral currency use with China to accelerate trade and investment and address dwindling dollar reserves, respectively. These agreements have renewed debates in Latin America and beyond about the prospects of growing Chinese influence in international monetary affairs, and a related decline in the dollar’s global dominance. China’s endeavors to promote global use of its currency, the renminbi (RMB) or “yuan,” have accelerated since the former People’s Bank of China’s (PBOC) Governor, Zhou Xiaochuan, first openly called for a reform of the international monetary system in 2009. But how much has the country really achieved in creating an alternative to the US-led monetary order?

The End of America’s Unipolar Moment

In the aftermath of the Global Financial Crisis, there was broad consensus, including in parts of Latin America, that the dollar’s global dominance had reached its peak. Friends and foes alike began to criticize the greenback’s outsized role in international markets, calling for a transition in favor of a system that would permit the increased use of domestic and other currencies.

Chief among these critics was China, a nation which had only recently entered the World Trade Organization (WTO) and was still beginning to venture into many overseas markets. At the time, for many leaders, especially in the Global South, China was also seen as offering an alternative to the neoliberal Washington Consensus, which urged fiscal discipline and financial liberalization. Its brand of state capitalism delivered remarkable economic growth and trade expansion at home, lifting hundreds of millions of people out of poverty, at a moment when much of the Global South, especially in Latin America, questioned the efficacy of neoliberal policies. Within a matter of decades, China moved from being a relatively small player in the global economy to demanding a leading voice in international monetary and financial affairs. By the late 2000s, in addition to capturing the attention of much of the developing world, it had also embarked on a full-fledged campaign to promote the international use of its currency.

China’s Currency Internationalization Campaign

China’s motivations for internationalizing the RMB could be described as both offensive and defensive in nature. On the one hand, China’s leadership has wanted to develop an alternative to the dollar as a vehicle currency for international trade and investment, and to increase the RMB’s standing as a global reserve asset. This would allow China’s partners to complete transactions in RMB and avoid Western clearinghouses and messaging systems, thereby promoting bilateral flows while undermining the dollar’s hegemony. However, China is also looking for ways to reduce its own dollar dependence and thus avoid being financially strangled in the face of increasing efforts by the United States to decouple the two economies. The sanctions levied on Russia for its unprovoked military aggression in Ukraine have reminded Chinese leaders of the direct costs associated with dollar use and the risks it could entail in case of a future conflict over the possible annexation of Taiwan. Hence, efforts to increase the RMB’s acceptance as an international currency could also be interpreted as supporting future strategic autonomy. 

But to what extent has China achieved its these aims? Many experts have noted that the dollar remains the preeminent global currency of choice across the three functions of money—as a medium of exchange, a unit of account, and a store of value—and that the RMB has been broadly unable to diminish the dollar’s relative dominance. After all, the dollar continues to dominate international bond markets, cross-border trade credit, and foreign exchange turnover. According to the US Federal Reserve, the dollar has been used in 96 percent of trade in the Americas over the past 20 years, not to mention that certain countries (e.g., Ecuador, El Salvador, and Panama) have adopted it as legal tender. And even though its share in official foreign exchange reserves has measurably declined since 1999, the dollar still leads the second largest reserve currency— the euro—by almost 40 percentage points.

Table 1: Global Use of Currencies, 2022 (percent)

Source: Author compilation, using data from BIS (2022), IMF (n.d.), and SWIFT (n.d.)

By contrast, international use of the Chinese RMB remains relatively limited, especially considering the country’s economic and financial might. Despite earlier predictions that it would dethrone the dollar, the RMB has been stuck in its current role as the world’s fifth most used currency for almost a decade. Its share in foreign exchange turnover, official reserves, and global payments pales in comparison to the euro, let alone the dollar. And although China has become South America’s top trading partner, as well as a major source of foreign direct investment, the use of the RMB in the region remains low.

True, the yuan has been making inroads into Latin America in recent years, but it is still far from constituting an impending threat to the dollar’s regional dominance. For example the RMB recently topped the euro as Brazil’s second foreign reserve currency, but at 5.37 percent of Brazil’s total foreign reserves, it is still eclipsed by the dollar, which accounts for 80.42 percent. This year, the country has also begun accepting trade settlements and investments in yuan thanks to a February deal that established an offshore clearinghouse (similar to the ones in Argentina and Chile), although there are no official statistics indicating the extent of those transactions.

The yuan has been making inroads into Latin America in recent years, but it is still far from constituting an impending threat to the dollar’s regional dominance.

Still, Brazil—and indeed all of Latin America—continues to rely heavily on the dollar not only for its trade with the United States, but also with other countries, including within the region itself. As China’s footprint in the Latin American region continues expanding, whether under the guise of the Belt and Road Initiative (BRI) or other platforms, more companies could begin accepting payments in RMB. But for now, the RMB’s presence is notable in just a few isolated cases.

China’s Monetary Highways

It is of course possible that this maximalist view is quick to overlook the PBOC’s gradual but incremental progress in the international monetary system, and that we should avoid drawing comparisons between the dollar and the RMB because they are operating in very different leagues—at least for now. Indeed, driven by China’s strong economy and overseas clearinghouses, the RMB has become one of the world’s top five currencies in less than a decade. In 2015, the International Monetary Fund also included the RMB in its Special Drawing Rights basket of currencies, despite it not being fully convertible. And in 2023, the RMB reached a significant milestone by overtaking the dollar as China’s main cross-border transaction currency for the first time.

One way to look at China’s progress is by analyzing the establishment of a number of monetary “highways” to encourage the RMB’s use in foreign markets. For example, between 2009-2020, the PBOC signed more than 40 bilateral swap agreements (BSAs) with foreign central banks, collectively worth over US$500 billion, more than any other in history. These swap lines have been deployed to promote trade settlement in RMB and provide a short-term liquidity backstop for partner countries. And although (so far) China has proven broadly ineffective in achieving its first objective, the BSAs have shown some potential as an emergency mechanism for economies in crisis. Argentina, which activated its swap line in January 2023, and will now expand it further, is a case in point.

Another monetary highway is the Chinese Interbank Payment System (CIPS), which was established in 2015 to provide an alternative to both the SWIFT network and other Western clearing systems. CIPS is currently made up of over 1,300 financial institutions (including 17 from South America), divided into direct and indirect participants, which clear RMB-denominated transactions among themselves and on behalf of others, including in support of cross-border trade. Critics point out that CIPS is still comprised of a relatively small network of mainly Chinese banks and that its transaction volume is substantially lower than that of its Western counterparts. However, its transactions are growing, and other countries will likely join in the future. So, while China’s monetary highways aren’t particularly busy at present, we’ll likely see more traffic in the coming years. 

Recent agreements with Brazil and Argentina are a part of this growth. China’s deal with Brazil, signed in March 2023, promised the expansion of RMB usage to accelerate trade and investment and facilitate cross-border settlements. The deal with Argentina, announced in April, will allow the country to pay for Chinese imports in RMB to alleviate pressure on the country’s weakened dollar reserves. 

Both decisions support China’s currency internationalization campaign, providing these countries with opportunities for direct trade with China while reducing exposure to the dollar. Brazil, in particular, has long been an ardent critic of the dollar’s dominance. President Lula da Silva recently stated: “Every night I ask myself why all countries have to base their trade on the dollar…why can’t we do trade on our own currencies?” Argentina will also welcome an easing of dollar outflows, which have been a source of economic instability. The country has faced a sharp drop in agricultural exports due to a historic drought, leaving its dollar reserves at critical levels.

The Limits of China’s Currency Internationalization Efforts

Though notable, recent deals with Brazil and Argentina are just a minor step toward China’s currency internationalization goals. In practice, structural limitations will continue to limit China’s ability to challenge the dollar’s global dominance. In particular, Beijing’s insistence on maintaining strict capital controls and a managed currency peg to the dollar discourages its widespread adoption in international markets. Investors are drawn to currencies that have stable and predictable political and macroeconomic systems, widespread international appeal, and open financial markets where transparency, the rule of law, and private property are assured. The RMB falls short in many of these areas.

Though notable, recent deals with Brazil and Argentina constitute still-limited progress toward China’s broader currency internationalization goals.

In the past 200 years, the leading international currencies (the British pound and the US dollar) were issued by countries with sound democratic institutions, durable international alliances, and liberal economic frameworks. In this sense, the RMB could face difficulties attracting a critical mass of foreign users unless China was to agree to certain political and social reforms. While the war in Ukraine has certainly exposed some division between the Global North and the Global South, the international monetary system appears to still be governed by mostly liberal norms. 

Growing tensions between China and the United States are also impactful. The trade and tech disputes that began under the Trump administration and the possibility of future conflict with the United States over Taiwan, have no doubt hindered China’s progress toward RMB internationalization—and will continue to do so unless there is some sort of détente. Some worry about the prospects of an emerging bipolar currency order, in which two self-contained monetary and financial systems emerge, with likely devastating consequences for the global economy. In this scenario, the RMB would have its own, relatively small, sphere of influence.

Conclusion: What’s Next?

While the dollar remains dominant, there are several governments looking to reduce their reliance on it, including in the Americas. China’s alternative is still far from constituting an impending threat to the wider dollar network. But China’s careful approaches to expanding the RMB’s bilateral use have made some progress, including in Brazil and Argentina. The RMB has potential to rival the dollar, but its use in foreign markets is still substantially less prominent, so a real rivalry would take a while, if it happens at all. In the meantime, the United States might decide to rethink its approach in Latin America and elsewhere, offering countries a greater say in international monetary relations.

* As two currencies are involved in each transaction, the sum of shares in individual currencies will equal 200 percent.

** Including intra-eurozone payments

Miguel Otero-Iglesias is a senior analyst at Elcano Royal Institute and professor and research director of international political economy at the School of Politics, Economics and Global Affairs and the Center for the Governance of Change at IE University in Spain. In addition, Otero-Iglesias is senior research fellow at the EU-Asia Institute at ESSCA School of Management in France. His main research area is international money and finance.

Agustin Gonzalez-Agote is a junior researcher at the Center for the Governance of Change at IE University in Spain and a research assistant at Elcano Royal Institute. Gonzalez-Agote is also a freelance writer on issues related to central bank digital currencies (CBDCs) and distributed ledger technologies. His main area of research is international political economy.