As of September 2023, the Chinese Yuan has surpassed the Euro, securing its position as the world’s second-most utilized currency in SWIFT trade settlements, with a notable 5.8% share in international payments. This notable shift not only signifies China’s expanding economic influence but also underscores its strategic efforts toward the internationalization of its currency, greatly supported by its engagement with BRICS nations. This development serves to underscore the increasing importance of the Yuan in the realms of global trade and finance, illustrating the Chinese economy’s progress beyond its European counterpart. In this article, we will delve into the present conditions of two principal currencies: the Yuan of China and the Euro of the European Union. We will investigate the strategic visions both regions hold for the futures of their currencies and analyze how China’s affiliation with BRICS has propelled its role in worldwide trade.
We initiate our exploration by investigating the driving forces behind the Yuan’s ascension over the Euro. The rise of the Yuan has been significantly propelled by international borrowing facilitated by Chinese banks, attributed to the lower interest rates of the Yuan. This surge in borrowing, manifested through Yuan-denominated bonds and loans, has markedly amplified the Yuan’s global financial presence, primarily serving China’s domestic needs. The issuance of Panda and Dim Sum bonds has reached new heights, demonstrating a substantial increase in the use of the Yuan, particularly in trade finance, where it has recently surpassed the Euro.
However, the journey to becoming a global reserve currency involves challenges beyond merely increasing its share in trade finance. The Yuan continues to face obstacles regarding internationalization, including the limited use and circulation of international Yuan bond proceeds and its predominant application within certain bilateral contexts rather than on a global scale. Despite the Yuan’s growing international profile, its use remains largely confined to countries with friendly relations with China or those involved in the Belt and Road initiative and BRICS.
Trade among BRICS nations could significantly impact the circulation and value of the Yuan, primarily through efforts aimed at de-dollarization and promoting the use of local currencies in transactions and loans. The New Development Bank (NDB), established by BRICS countries, embodies such efforts by issuing renminbi-denominated Panda bonds and offering loans in the local currencies of member countries. This approach not only facilitates the use of the Yuan within the BRICS but also mirrors a broader strategy to diminish reliance on the US dollar. The NDB’s initiatives illustrate a dedication to providing loans in local currencies, with a substantial portion of its portfolio in renminbi loans, showcasing the potential to boost the Yuan’s international circulation and value through intra-BRICS trade and financial cooperation.
Moreover, the introduction of Yuan oil futures marks a strategic maneuver by China within the BRICS framework to challenge the dominance of the US dollar in the global oil trade. By advocating for the use of renminbi in oil trading and its convertibility into gold, China positions the Yuan as a viable alternative to the dollar. This move not only elevates the Yuan’s international stature but also aligns with the broader BRICS goal of de-dollarizing critical global trade sectors. Despite being relatively new compared to established benchmarks like Brent and WTI, the success of Yuan oil futures highlights the potential for increasing the Yuan’s circulation and value by leveraging trade among BRICS nations, particularly in essential sectors like energy.
Furthermore, a mathematical model examining the trade currency preferences (TCP) across nations indicates a shift toward favoring trade in CNY (Chinese Yuan) over the USD (US Dollar), suggesting a structural advantage for countries, including BRICS members, to engage in trade using currencies other than the USD. This analysis highlights the growing inclination toward the Yuan and the potential for a new BRICS currency (BRI) to facilitate trade within the bloc, further enhancing the Yuan’s circulation and value. The model’s findings reveal a significant interest and readiness among countries to diversify away from the dollar, which could benefit the Yuan as BRICS nations enhance trade ties and financial cooperation.
Analyzing the future trajectory of the Yuan and the Euro amid varying election scenarios in Europe and the US necessitates a consideration of both geopolitical and economic factors. For the Yuan, China’s economic policies and international relations, particularly with the US and European nations, play a pivotal role. US elections can significantly impact US-China relations, influencing trade policies, tariffs, and the general sentiment toward Chinese investments. An administration in the US with a stringent stance on China could precipitate a more volatile trade environment, potentially affecting the Yuan’s stability and its standing on the international stage.
For the Euro, elections within the European Union (EU) member states and the European Parliament elections are crucial in determining the currency’s direction. A shift toward more populist or Euro-skeptic parties could challenge the cohesion of the EU, affecting fiscal policies and the bloc’s approach to addressing economic challenges. For example, a move toward fiscal conservatism or austerity in major economies, such as Germany or France, could fortify the Euro by promoting fiscal stability. Conversely, political shifts threatening the EU’s unity could introduce uncertainty and weaken the Euro.
The economic policies of newly
elected governments in Europe can also influence the Euro’s path. Policies that favor growth and stability within the EU are poised to bolster the Euro, whereas contentious or fragmented political landscapes may impair economic decision-making, potentially diminishing the currency’s strength.
Moreover, Brexit and its ensuing negotiations have previously illustrated how political events can induce fluctuations in the Euro’s valuation. Future elections that usher in governments with pronounced stances on EU membership or EU policies could engender similar volatility.
The interplay between the US and the EU concerning trade, sanctions, and regulatory cooperation also plays a crucial role in shaping the Euro. An American administration that prioritizes multilateralism and strengthens alliances with European allies could enhance the Euro by fostering trade and investment between the two regions.
Turning our attention to the potential impact of digital currency, it’s evident that Central Bank Digital Currencies (CBDCs) are making significant strides in both China and Europe, with the potential to redefine the future landscape of the Yuan and the Euro. In China, the considerable transaction volume of the digital Yuan, also known as e-CNY, signifies China’s forefront position among nations developing their CBDCs, primarily for domestic retail payments. The circulation of e-CNY, while only representing a small fraction of China’s total money supply, supports a significant number of transactions, highlighting its efficiency and velocity. The involvement of Chinese state-owned banks in cross-border transaction trials further demonstrates the potential for international application.
In Europe, the ongoing momentum behind CBDCs, highlighted by the European Central Bank (ECB)’s initiation of a preparation phase for a digital Euro, underscores the Eurozone’s commitment to digital currency innovation. This preparation phase aims to establish a digital counterpart to cash that ensures offline services, high levels of privacy, and instantaneous settlements. Spanning at least two years, this phase focuses on developing a comprehensive rulebook, selecting platform and infrastructure providers, and conducting extensive testing, signifying a transformative step towards modernizing the financial landscape.
The adoption and integration of CBDCs by both the Yuan and Euro could significantly influence their standing in the international arena, offering a pivotal step towards the modernization of financial systems. This development promises to enhance efficiency, reduce costs, and open new avenues for global trade and investment, marking an evolutionary leap in the digital age of currency.
Exchange rate of Euro and Yuan
The Chinese Yuan’s position relative to the Euro has seen significant developments, reflecting broader economic trends and policy initiatives from China and the European Union. As of 2024, forecasts suggest a nuanced scenario where both currencies are expected to experience fluctuations in their exchange rates, indicating a dynamic and interconnected global financial landscape.
The Euro to Chinese Yuan (EUR to CNY) exchange rate is predicted to see slight increases in the short term. For instance, there are expectations for the EUR/CNY rate to rise to ¥7.83, marking a 0.23% increase, and potentially reaching up to ¥7.87 within the next week, signifying a 0.75% increase. These movements are part of a broader trend where the Yuan is forecasted to strengthen against the Euro over the next several years, with projections showing the EUR/CNY exchange rate reaching yearly highs up to ¥8.32 by 2027【76†source】.
Conversely, the Chinese Yuan to Euro (CNY to EUR) forecast indicates a short-term decrease, with the exchange rate expected to drop slightly, signifying a minor depreciation of the Yuan against the Euro. However, in the longer term, forecasts predict variations with the Yuan showing both periods of appreciation and depreciation against the Euro, highlighting the fluid nature of currency exchange dynamics. By 2030, the exchange rate is expected to show a slight increase, suggesting a nuanced and balanced exchange rate development between the two currencies【78†source】.
These forecasts reflect broader economic strategies and market sentiments. China’s push for internationalizing the Yuan, including the development and rollout of a digital Yuan, aims to increase its currency’s global usability and reduce dependency on the US dollar. This initiative is part of China’s broader strategy to expand its economic influence globally【77†source】. On the other hand, the Euro’s position is influenced by the European Central Bank’s policies, market dynamics within the Eurozone, and broader geopolitical factors that impact investor sentiment and currency valuation.
The dynamic interplay between the Yuan and the Euro is emblematic of larger shifts within the global financial system, where digital currencies and strategic economic policies are increasingly playing pivotal roles. These developments underscore the importance of monitoring exchange rates, economic policies, and market trends to understand the future trajectory of these major currencies.