Yuan helps safeguard financing in developing countries

The Chinese renminbi, also known as the yuan, has emerged as a safeguard of global financial stability, shielding an increasing number of developing economies from the spillover effect of drastic adjustments in the United States' monetary policy, experts said.

Argentina's use of the renminbi to repay its debts to the International Monetary Fund, in particular, has underscored the currency's potential in mitigating developing economies' common challenge of a US dollar shortage and revamping the global monetary system, they said.

In late July, Argentine Economy Minister Sergio Massa announced that the nation's government will use the liquidity provided by the currency swap agreement with China to repay $1.7 billion of its $2.7 billion payment obligations to the IMF, and expressed his thanks to the Chinese government, China Central Television reported.

"The move was not only a significant, innovative step in renminbi internationalization, but also helped Argentina tackle the challenge of a severe dollar shortage," said Yue Yunxia, director of the department of economics at the Chinese Academy of Social Sciences' Institute of Latin American Studies.

Argentina's economy is plagued by a shortage of dollar reserves amid drastic local currency depreciation due to severe stagflation. The situation was further worsened by the US Federal Reserve's aggressive interest rate hikes, which intensified the Argentine peso's depreciation and increased the country's debt burden, Yue said.

In this context, Argentina's currency swap agreement with China has provided it with lower-cost renminbi financing that helped the country fulfill its payment obligations to the IMF, preventing liquidity stress from evolving into a solvency crisis, Yue added.

In June, the People's Bank of China, the nation's central bank, and the Central Bank of Argentina renewed their bilateral currency swap agreement at a three-year swap scale to 130 billion yuan ($17.9 billion) for 4.5 trillion pesos ($13.05 billion). In a currency swap, a central bank borrows renminbi with its own country's currency as collateral and vice versa.

Experts deem Argentina's renminbi repayment plan as an example of the Chinese currency's growing role in safeguarding the financial stability of developing economies as they increasingly opt for the yuan in international settlements and financing.

"The renminbi has provided economies suffering from a dollar shortage with an alternative option for trade settlements," said Wang Jinbin, a professor of economics at the Renmin University of China.

Joining Brazil and Argentina, Bolivia became the latest South American economy to regularly use the renminbi in international trade, The Associated Press reported in July.

Globally, the Chinese currency's share of global payments had risen for five consecutive months to 2.77 percent in June, the highest level since January 2022, according to global financial messaging platform SWIFT.

Wang said the challenge of a dollar shortage is common among developing economies amid the US Fed's drastic interest rate hikes.

For those economies, using the renminbi in trade settlements can prevent the greenback shortage from hindering their foreign trade and mitigate depreciation pressure on their local currencies against the dollar, thus helping to shore up financial stability.

Liu Chunsheng, an associate professor of international trade at the Central University of Finance and Economics, said the renminbi's emerging role as a financing currency also helps developing economies diversify their external debt, lower their financing costs and contribute to debt sustainability.