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China’s use of the renminbi in cross-border transactions has hit a record high this year as closer ties with Russia support Beijing’s efforts to internationalize its currency and reduce reliance on the U.S. dollar.

In July, 53 percent of inbound and outbound transactions in China were settled in the Chinese currency, compared with about 40 percent in the same month of 2021, according to the State Administration of Foreign Exchange.

The Safe data show cross-border transfers from banks on behalf of non-banks and mainly represent trade settlements, but also capture investment flows and debt repayments.

Cross-border use of the Chinese currency received a boost after US sanctions limited Russia’s ability to transact in dollars following the invasion of Ukraine. In February this year, Russian Central Bank Governor Elvira Nabiullina said the use of the Chinese currency for settlements, financial transactions and deposits had “increased sharply”.

“The sanctions situation was an enormous incentive for China to further develop its (financial) system and to develop solutions to link the Chinese system with the Russian one,” says Alexandra Prokopenko, research associate at the Carnegie Institute in Berlin.

The growth of trade settled in renminbi was also boosted by the currency swap lines that Beijing opened or renewed during 2023 with Saudi Arabia, Argentina and Mongolia – all commodity producers whose goods China demands.

Since 2022, new clearing banks for the renminbi have also been established in Laos, Kazakhstan, Pakistan, Brazil and Serbia, according to the People’s Bank of China.

One of the reasons China has kept its exchange rate against the US dollar stable this year despite selling pressure on the yuan, some analysts say, is that it wants to encourage its trading partners to trade more in renminbi. Chinese President Xi Jinping has repeatedly called for a strong currency.

“You can’t go to Indonesia, Thailand or South Korea and say, ‘Hey, let’s trade in renminbi instead of dollars’ when the currency there is weak. You need a stable currency for that,” says Louis-Vincent Gave of Gavekal, a financial services provider.

Beijing’s previous efforts to internationalize the renminbi stalled after the PBoC implemented a currency devaluation in 2015 to counter a slowdown in economic growth. While this increased the competitiveness of Chinese exports, it led to a significant decline in the use of the renminbi for payment settlements, which took years to reverse.

Edwin Lai, a professor at the Hong Kong University of Science and Technology and a specialist in the internationalization of the renminbi, said it was “normal” for large economies like China to conduct most of their trade in their own currency.

“By international standards, this is not a great achievement,” Lai said. At the same time, he noted, “they have obviously improved.”

He said Beijing was not seeking to compete with the US dollar, but Chinese officials did not want to be “at the mercy” of the currency.

Globally, the renminbi still lags far behind the dollar in trade financing. According to the latest data from the international payments network Swift, it only accounts for 4.74 percent of global payments, lagging behind the dollar, the euro and the pound.

However, alternative payment systems such as China’s CIPS and other private networks make it less reliable to rely on Swift to get a complete picture of global currency transactions, says Lucy Ingham, editor-in-chief of FXC Intelligence, a consultancy that tracks digital payments.

A further increase in the renminbi’s share in global trade finance could be limited by Western reluctance to use the renminbi.

“I think it is very unlikely that China’s trade with the United States and the European Union will be switched to the Chinese currency,” said Daniel McDowell, a professor at Syracuse University and senior fellow at the Atlantic Council.

Long-standing obstacles to wider use of the renminbi – particularly China’s capital controls and the strong network effects that favor the use of the U.S. dollar – limit its progress beyond trade settlement.

Most currency traders still prefer to trade in the dollar, says Wee Khoon Chong, a senior market strategist at BNY in Hong Kong.

“We are seeing an increasing use of the renminbi as a means of payment among our customers,” Chong said. However, he said its use has not yet reached “a critical tipping point” where it would displace a major currency. “It’s a slow process.”

China “is not trying to overthrow the global dominance of the dollar,” McDowell said. “That brings with it a lot of responsibility and acceptance of certain vulnerabilities … China’s motives here are primarily autonomy and resilience.”

Additional reporting by Nian Liu and Wenjie Ding in Beijing