China is using its trade advantages to encourage its partners to use the yuan more. The newspaper writes that Beijing plans to challenge the dollar’s dominance in the global monetary system in order to reduce its reliance on dollar assets and prevent the “financial drowning” of the United States. South China Morning Post (SCMP).
To bolster their position, analysts of the publication recalled the recent agreement between China and Brazil on the use of the yuan in bilateral agreements. Brazil is Beijing’s tenth largest trading partner and a major supplier of iron ore and soybeans. In 2022, trade turnover between countries reached a record level of 150.5 billion dollars.
On March 29, the countries agreed to set up an offshore clearing house. This decision will allow them to abandon the US dollar in bilateral trade and make the yuan to real conversion “faster and less costly”, the G1 portal has previously stated.
Also, by the end of 2022, Brazil’s yuan-denominated foreign exchange holdings reached 5.37%, surpassing the country’s share of savings in euros, writes SCMP. However, Brazil’s foreign currency savings in US dollars still account for more than 80%.
“The rise in yuan deals with South America’s largest country shows how Beijing is trying to avoid a ‘financial suffocation’ on the ground of withdrawal from the US,” the newspaper points out.
At the same time, analysts of the publication note that the widespread use of the yuan is still limited by the fact that the yuan is less convertible than the dollar or euro, and Beijing maintains strict capital controls.
Currently, the yuan accounts for only 2.19% of global payments, 3.5% of global foreign exchange transactions and 2.69% of central bank reserves. The yuan also makes up 12.8% of the IMF’s currency basket with special drawing rights.
Russian and settlements in yuan
Moscow, Beijing’s ninth largest trading partner, also significantly increased its yuan presence in foreign exchange reserves and sovereign funds. In 2022, the share of the yuan in export payments in Russia rose from 0.5% to 16% and the share of the ruble from 12% to 34%, the Bank of Russia previously reported. Also, in August 2022, the Russian Federation became the third country in the world in terms of offshore payments in yuan (passing through outside of China) from the SWIFT report.
“In the short term, this de-dollarization reflects the cracks in the international monetary system dominated by the US dollar against the background of the geopolitical situation” Says a study by China International Capital Corporation, one of China’s leading investment banks.
The plan for the dedollarization of the Russian economy was presented to the government in 2018. Russian officials cited threats of sanctions as the reason for leaving the dollar in foreign trade deals. The problem became even more urgent on the backdrop of large-scale sanctions imposed by Western countries after the start of the military operation in Ukraine.
In March, Vladimir Putin said in a meeting with Chinese President Xi Jinping that Moscow supports the transition to the yuan in foreign trade agreements with Asian, African and Latin American countries.
Yuan expansion
China has reported double-digit growth in trade deals and investments in yuan in recent years. According to the Ministry of Commerce of the PRC, the volume of transactions in Chinese currency in the implementation of cross-border trade in China in 2022 increased by approximately 37% to reach 7.92 trillion yuan ($1.15 trillion). RMB deals on direct investment rose 16.6% year on year to 6.76 trillion yuan.
Analysts interviewed by the SCMP believe that in the future we should expect a wider use of the yuan for investments in countries participating in the One Belt, One Road initiative. The same trend can be observed in cross-border digital payments and bilateral crude oil trade with Middle Eastern countries. Notably, in February, Iraq announced that it had agreed to conclude trade deals in yuan.
“This showed a long-term trend that the international status of the US dollar will eventually match its economic position,” said experts interviewed by the publication.
irreversible process
Le Figaro columnist Renaud Girard, in turn, noted that dedollarization “will not happen overnight, but it is clearly an irreversible process”.
The expert believes, “By transforming their currency into a tool of political pressure on other states, the Americans unwittingly started a worldwide movement to overthrow the dollar king.”
As an example, he cited the situation with the freezing of dollar reserves of the Bank of Russia against the backdrop of hostilities in Ukraine. According to the analyst, some countries have started to reduce their dollar trade in this regard.
“This is what Russia and Saudi Arabia are doing now. The last oil bill was billed in yuan to China,” Girard said. As an alternative to the BRICS countries’ plans to create their own currencies for mutual payments and the SWIFT system developed by China drew attention to the electronic system of mobile interbank payments.