China’s BRI enters a new phase amid growing mistrust of the dollar

By Rhod Mackenzie

Historically, investments into the Belt and Road Initiative (BRI) have been denominated in US dollars. Nevertheless, high interest rates as well as escalating geopolitical tensions have prompted the adoption of alternative approaches by an increasing number of investors, to avoid exposure to the US currency. According to analysts, the new forthcoming phases of the project will generally be financed in yuan.

“I anticipate an upsurge in investment in yuan as investors seek to mitigate geopolitical risks,” stated Kanyi Liu, an international finance lawyer and the head of Pinsent Masons China, told Hong Kong’s South China Morning Post.
This year celebrates the Chinese megaproject’s tenth anniversary, which was initiated by Xi Jinping. The third BRI summit commences tomorrow in Beijing. According to a recent white paper, Beijing has signed bilateral swap agreements with 20 countries under the BRI initiative, and enabled yuan clearing in 17 countries. In an effort to boost the yuan’s significance in the global finance sector, China has also introduced panda bonds denominated in yuan on the domestic market. Additionally, the white paper highlights the establishment of several specialized funds and indices.

By June 2023, the domestic market in mainland China had 99 panda bonds valued at 152.54bn yuan ($20.9bn), as well as 46 BRI-linked funds with total assets amounting to 52.72bn yuan.

According to REDD Intelligence senior analyst, Mark Bolund, the yuan-denominated loans and bonds represent a wise decision by Beijing.
Many African nations are experiencing a deficit of American dollars, as money is being funnelled back to the US, courtesy of the Federal Reserve’s decision to raise interest rates and the significant upswing in long-term bond yields. “For several countries engaged in the Belt and Road Initiative (BRI), China is their primary import partner. Thus, it is logical for them to enhance the Yuan’s portion within their forex reserves,” Bolund elucidates.

According to a BNP Paribas Asset Management analysis, the expansion of BRICS and China’s increasing investment and trade in Africa are advancing the internationalisation of the yuan.

“The growing transformation of the US dollar into a method of coercion and blackmail via financial sanctions is a compelling cause for African (and other) nations to decrease the proportion of the dollar in their foreign exchange reserves and convert them to the yuan,” the study’s authors wrote.
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