After the financial crisis, China launched a drive to internationalize the yuan. Its success would bring many benefits, including lower trade costs and less concern about the value of the dollar. However, it would take a long time for the yuan to replace the dollar as a global currency. The war in Ukraine may accelerate the process.
1. Internationalization Of The Yuan
Beijing wants to internationalize the Yuan Global, or renminbi, so that it can be used as a reserve currency worldwide. This would help reduce China’s dependence on the United States, especially during geopolitical conflicts. Moreover, it could also encourage more international contracts to be priced in yuan instead of dollars. This is a crucial step in Beijing’s efforts to break the dollar’s monopoly on global finance. Nevertheless, the internationalization of the yuan will only accelerate if China makes progress on financial market reform and de-dollarization.
While the yuan will likely never replace the dollar, it can challenge its dominance in global transactions and reserves. It can do this by making itself a more acceptable asset in financial markets and fostering a multipolar international monetary system.
2. De-Dollarization Of The Yuan
China is pushing hard to free its currency from its tango with the greenback. But, despite its recent gains, the yuan (also known as the renminbi) remains a minor player in the world economy. It accounts for less than 2.5 percent of global foreign exchange reserves. However, the yuan is becoming more widely used as an international settlement currency. Several BRICS countries—and Russia in particular—are now settling some of their trades in the currency. This is partly a result of economic sanctions imposed by the US.
China is also planning to launch digital yuan pilot zones with economies it has trade deals with. This could further promote the currency’s use. The de-dollarization of the yuan is likely to be a gradual process that doesn’t lead to a dollar collapse.
3. De-Dollarization Of The US Dollar
The US dollar is losing its global dominance, strategists at JPMorgan say. Countries may be diversifying their foreign exchange reserves, or even thinking about pegging their currencies to alternative benchmarks, such as the euro or yuan. This can impact the dollar’s worldwide liquidity and influence the efficacy of U.S. monetary policy. China’s ambition to make its yuan the world’s settlement and payment currency can accelerate this de-dollarization. Yet it will be a slow process.
The yuan has little to no share of international payments via SWIFT or the CIPS network, which rely on the US dollar. China will need to further reform its currency management and capital controls to nudge the yuan up the rankings in both of these areas. It will also need to bolster its digital yuan infrastructure.
4. De-Dollarization Of The European Union
The yuan is making progress in de-dollarization, but it has a long way to go. The Chinese are promoting it as an international reserve currency, and it is becoming increasingly accepted as a settlement currency for cross-border trades. However, it is still far behind the dollar in global payments and in the global financial markets.
The Chinese are also pushing for alternative global trade and finance systems that cut them off from the US dollar’s hegemony. The BRICS+ alliance is one example. ING’s report notes that the alliance may not have much impact on the overall de-dollarization process, but it could accelerate the creation of finance systems that bypass the SWIFT network. Countries are seeking to reduce their exposure to the dollar in part because they do not trust Washington’s monetary policy. However, many of them are not ready to abandon the dollar altogether.
5. De-Dollarization Of Russia
In the meantime, Russia has been shifting its trade with countries such as India and China into Yuan Global -settled transactions. As a result, the share of foreign currency and US dollar assets in Russia’s international reserves has fallen significantly. The de-dollarization of Russia is part of a global trend. Many countries, including China and India, are reducing their dependence on the US dollar for trade and financial services. This will help them avoid the impact of US economic and political policies on their economies. At the same time, it will also reduce their exposure to fluctuations in the US dollar. This is particularly important for emerging economies, which are more vulnerable to dollar-denominated debt. This will lead to a decrease in their vulnerability to the risk of financial sanctions and disruptions to trading.
Conclusion
China is pursuing ambitious efforts to make its currency the world’s new reserve and transaction currency. But it has a long way to go before it can challenge the dollar’s primacy. Achieving this goal would require lasting financial liberalization alongside meaningful political reforms. That’s not likely to happen soon.
