The US dollar dominates the global trade. But China’s renminbi is catching up as an invoice currency

Argentina is also known to suffer from periodic macroeconomic crises. There is one unfolding in Argentina right now. The US government has offered a swap line of $20 billion to help Argentina manage yet another run on its currency.

This decision has sparked a lot of snarky remarks about how Argentine president Javier Milei needs government intervention to keep his free-market agenda alive. Much of this criticism is unfair.

Yet, there could also be another factor driving the decision of the US government to offer a lifeline to Argentina, one that seems based on a geo- political calculation. It is apparently based on what happened during an earlier episode of a severe dollar shortage—in 2023.

In that year, Argentina was once again battling a run on its currency. The country expanded a swap line with the People’s Bank of China. Over the next few months, the use of China’s renminbi (the official name of its currency with yuan as its unit of account) as the preferred currency for trade invoicing shot up, and at one point became bigger than the US dollar.

Though the American currency later regained its top slot as the main currency in which Argentine exporters and importers invoiced their international trade, that short episode highlights the possibility that currency dominance in our era may not be driven just by liquid markets in the country issuing the dominant global currency, but also through its use as an invoicing currency.

That also means that the internationalization of a challenger currency such as the renminbi needs to be backed by a strong central bank, rather than deep domestic financial markets.

What is the situation on the ground? A new paper for the International Monetary Fund by six economists—Emine Boz, Anja Brüggen, Camila Casas, Georgios Georgiadis, Gita Gopinath and Arnaud Mehl—is based on an updated database on trade invoicing from 132 countries from 1990 to 2023.

Some of the main findings are especially interesting in an unstable world, one in which even India is trying to figure out the settlement of bilateral trade in a currency other than the US dollar.

First, the dominance of the US dollar as the preferred currency for trade invoicing continues. The euro is a distant second. There is little evidence of a big shift away from the greenback. However, there are certain subterranean shifts that are worth paying attention to. The most important is that even while the use of the renminbi is still at modest levels, its use is gradually increasing, initially in Asia but now in other parts of the world as well.

Second, geopolitical linkages are gaining importance in a world that is rapidly fracturing. Much has changed since the Russian invasion of Ukraine in February 2022.

Countries that are not geopolitically aligned with the US, which is measured through an analysis of voting patterns at the United Nations, are gradually shifting away from the dollar as their invoicing currency, replacing it with either their home currencies or the renminbi. This, the authors say, is evidence of “an emerging fragmentation in invoicing patterns along geopolitical lines."

In August 2024, the US Federal Reserve said in a note that the prospect of the Chinese currency replacing the US dollar in international trade is “out of the question in the foreseeable future." However, the US central bank also added that the role of the renminbi is likely to increase in the future.

American sanctions against Russia will first make the renminbi an attractive currency for trade with that country, but gradually spread as other countries worried about the threat of punitive US restrictions shift away from the dollar.

There are other reasons as well, including the sheer size of China’s international trade as well as the deliberate attempts by its government to internationalize its currency.

The note by the US Federal Reserves adds that the gradual rise of the renminbi as a preferred currency for the invoicing of international trade will in the future be naturally followed by its increased use as an international reserve currency that central banks hold as part of their foreign exchange reserves.

These are still long shots when one looks at the fact that the US dollar is still the currency of invoicing for around 65% of international trade by value. The renminbi accounts for just 5% in comparison. International monetary systems have strong network effects, which means countries get locked into using a particular currency for international transactions because other countries are also using it.

However, strategic efforts by Beijing to make its currency more attractive for international usage as well as global disruptions unleashed by US President Donald Trump seem to be supporting the slow rise of the renminbi as a currency for international trade invoicing.

The author is executive director at Artha India Research Advisors.