The Chinese Yuan is becoming more and more popular in international transactions as the United States dollar appreciates. Here’s what this looks like in ASEAN broadly and Vietnam, specifically.
In recent years, China has been actively encouraging the use of the renminbi (CNY), also known as the Chinese Yuan, in international transactions. This includes using CNY as a reserve currency, a means of exchange, and a unit of account. This has been remarkably successful with the volume of Chinese Yuan increasing in national reserves and international payments and settlements.
The war in Ukraine has also hastened the CNY’s internationalization. As Western powers sought to exclude Russia from the SWIFT payments system as part of sweeping sanctions, the need for an alternative to the US dollar for Russia became urgent. China, as one of Russia’s biggest trading partners, moved in to fill the void with the CNY.
In this light, as the CNY rises in prominence, it’s worth looking at how this could impact Vietnam and what role it could play in Vietnam’s trade with the wider world and supply chains.
The Renminbi’s rise in global trade
In 2016, the International Monetary Fund (IMF) approved the inclusion of the CNY in the Special Drawing Rights (SDR) currency basket. After the IMF’s approval, many countries began to raise the volume of CNY in their national reserves. Since then, reserves of the CNY have continued to increase, and last year it was the fifth most popular reserve currency.
Furthermore, the total amount of CNY sent over international borders in 2022 was 42.1 trillion Yuan (US$6.1 trillion), up 15 percent over the same period in 2021, according to data from the People’s Bank of China (PBOC).
Though the Chinese currency only accounted for roughly 2.3 percent of global payments, this still placed the CNY fifth in the world in terms of the most active currencies in international payments. It followed the United States Dollar (USD) with 42.71 percent of transactions, the Euro (EUR) covering 31.74 percent of transactions, the Great Britain Pound (GBP) responsible for 6.58 percent of transactions, and the Japanese Yen (JYP) at 3.51 percent.
This trend toward the CNY is also anticipated to continue with financial institutions like Goldman Sachs and CitiGroup predicting that the CNY will outshine the JPY and GBP by 2030 and become the third-most-used currency in global transactions.
Use of CNY in Southeast Asia
Over the past two decades, China has expanded its cooperation with its neighbors through various pacts, such as the Regional Comprehensive Economic Partnership (RCEP) and the ASEAN-China Free Trade Area. As a result, a number of RCEP countries and ASEAN member states have started to use the Chinese currency to settle imports and exports.
Notably, earlier in 2019, China started a financial and economic gateway in Guangxi on the border with Vietnam. The initiative’s primary objective is to increase and make cross-border trade settlement, currency transactions, investment, and finance in the CNY easier throughout Southeast Asia.
The CNY in ASEAN-China trade
The use of the CNY in cross-border settlements in 2021 between China and ASEAN countries reached 4.8 trillion CNY (US$684.96 billion), up 16 percent compared to the previous year and nearly 20-fold over the past decade, according to state media China Daily. This was helped along by bilateral currency settlement agreements with Vietnam, Indonesia, and Cambodia, besides currency swap agreements worth over 800 billion CNY (US$113 million) with Indonesia, Malaysia, Singapore, and Thailand.
A recent survey by TAB Insights found that more than 60 percent of respondents have a favorable view of a greater utilization of the CNY in the Southeast Asian region. In contrast, only 1 percent of respondents had a negative opinion of the CNY‘s increasing role in regional trade.
The CNY in intra-ASEAN trade
As the CNY Cross-Border Interbank Payment System (CIPS) expands, several ASEAN nations have begun using the CNY for trading payments between countries in the region. For instance, Indonesia’s Trade Minister has suggested increasing the use of China’s Yuan in trade and investment payments between ASEAN nations to reduce the reliance on the dollar and minimize conversion losses.
This is in line with the US Federal Reserve Bank tightening monetary policy, which has seen the dollar value experience a huge rise over the past year or so. This has hurt many Southeast Asian economies with contracts agreed in US dollars.
Additionally, the sanctions imposed on Russia have increased the anxiety of ASEAN nations over the widespread use of the US dollar in the area. This has made them eager to find alternative currencies so that they can continue to trade even if greater restrictions are applied to the US dollar.
With this in mind, it is likely that the CNY for intra-regional trade payments will become more popular moving forward.
Impact of a Rising CNY on Business in Vietnam
In 2022, bilateral trade between Vietnam and China reached US$234.9 billion, making Vietnam China’s leading economic partner among the 10 Southeast Asian countries (ASEAN) and its sixth-largest trading partner in the world. In this light, it is almost inevitable that Vietnam will be among the nations that stand to be most significantly affected by the internationalization of the CNY.
Regulations on CNY use in Vietnam
According to Circular No.19/2018/TT-NHNN issued in 2018, the Vietnamese government allows payments in Chinese Yuan at a number of border crossings between the two countries. These crossings are Dien Bien, Lai Chau, Lao Cai, Ha Giang, Cao Bang, Lang Son, and Quang Ninh.
This circular stipulates that individuals and businesses can choose to use either China’s Yuan or Vietnam Dong (VND) for payments.
Taking advantage of exchange rates
Despite the increasing use of CNY internationally, the exchange rate of CNY to VND has been on a downward trend over the last twelve months. From May 2022 to May 2023, it dropped in value by about 4 percent. Yet, at the same time, the USD to VND exchange rate has been on an upward trend increasing over the same period by roughly 1.5 percent. These figures indicate that in the short term, it may be more cost-effective for enterprises in Vietnam to import raw materials and products from China using CNY instead of USD.
Risks of using the CNY in international transactions
Fluctuating exchange rates
Nonetheless, using CNY as a payment method may come with some risks for companies. The fluctuation of the exchange rate, for example. Whereby the benefit of using CNY in payments is that the currency is depreciated against the VND, if the CNY to VND exchange rate rises in the future, those benefits may be lost.
To minimize this risk, when choosing the optimal payment method for their operations, businesses should meticulously weigh the exchange rate of CNY, USD, and VND against each other.
Overdependence on Chinese inputs
Another problem is that using CNY can make a company overly reliant on Chinese inputs. Due to this overdependence, there is a risk that any political unrest or unanticipated events in China, such as a pandemic or natural disaster, can have significant consequences on the value chain of companies importing from Vietnam’s northern neighbor.
For this reason, businesses should think carefully before signing any long-term contracts with China. They should also have diversified supply chains rather than depending primarily on single-market suppliers.
The CNY in international trade moving forward
Overall, despite the high probability that CNY use will continue to rise internationally, the Chinese currency is still far from replacing other major currencies like the USD or EUR.
In Vietnam, the use of the Yuan is still restricted and is subject to stringent regulation by the national government. Consequently, businesses operating in Vietnam that choose to use CNY as a payment mechanism should carefully investigate the policies governing the terms of trade in CNY. They would also do well to seek professional advice on how to make the most of alternative currencies to boost their bottom lines.
