US Dollar Vs China Yuan: Ukraine War Give Chinese Yuan The Boost It Needs To Become Major Global Currency Contender Against US Dollar
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As a professor of finance and an expert in international finance, I understand how this geopolitical conflict could put China’s currency in the next phase of its path to becoming a global currency – and the decline of the US dollar from its current dominance. may indicate the beginning of Slow Progress of the Chinese Yuan China has long wanted to make the yuan a global force and in recent years has made significant efforts to do so. For example, the Chinese government launched the Cross-Border Interbank Payment System, or CIPS, in 2015 to facilitate cross-border payments in yuan.
Yuan now the fifth most traded currency in the world
Three years later, in 2018, it launched the world’s first yuan-denominated crude oil futures contract to allow exporters to sell oil in yuan. China has also emerged as perhaps the world’s largest creditor, with governments and state-controlled enterprises extending loans to dozens of developing countries. And China is developing a digital yuan as one of the world’s first central bank digital currencies. Even trading hours for the yuan were recently extended on the mainland. Due to these efforts, the yuan is now the fifth most traded currency in the world. This is a phenomenal increase from its 35th position in 2001. The yuan is also the fifth most actively used currency for global payments by April 2023, up significantly from 30th place in early 2011.
Although the ranking can be misleading. The yuan’s average trading volume is still less than one-tenth that of the US dollar. Furthermore, almost all trading was against the US dollar, with very little trading against other currencies. And when it comes to global payments, the yuan’s real share is just 2.3%, compared to 42.7% for the dollar and 31.7% for the euro. The yuan accounted for less than 3% of world foreign exchange reserves at the end of 2022, compared to 58% for the dollar and 20% for the euro. Questions over US dollar dominance The US dollar has dominated as the dominant global currency for decades – and concerns about how this benefits the US and potentially hurts emerging markets are not new. The value of the US dollar increased significantly against most other currencies in 2022 as the Federal Reserve raised interest rates.
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US and Western allies impose sanctions on Russia
This had negative consequences for residents of almost any country that borrows in dollars, pays for imports in dollars, or buys wheat, oil, or other commodities in dollars, as these transactions become more expensive. After Russia invaded Ukraine in early 2022, the US and its Western allies imposed sanctions on Russia, including curtailing Russia’s access to a global dollar-based payment system called the Society for Worldwide Interbank Financial Telecommunication or Also known as Swift. This clearly demonstrates how the dollar can be weaponised. With Russia largely cut off from international financial markets, it increased its trade with China.
Russia began receiving payments for coal and gas in yuan, and Moscow increased its holdings of yuan in its foreign exchange reserves. Russian companies such as Rosneft issued bonds in yuan. According to Bloomberg, the yuan is now the most traded currency in Russia. Other countries took note of Russia’s increasing use of the yuan and saw an opportunity to reduce their dependence on the dollar. Bangladesh is now paying Russia in yuan for the construction of a nuclear power station. France is accepting payment in yuan for liquefied natural gas bought from China’s state-owned oil company. A Brazilian bank controlled by a Chinese state bank is becoming the first Latin American bank to participate directly in China’s payment system, CIPS.
China is keeping a tight grip on the money coming and going in the country
Iraq wants to pay in yuan for imports from China, and even British retailer Tesco wants to pay in yuan for its Chinese imports. The combined dollar amount of these transactions is still relatively small, but the change in yuan is significant. The yuan is still not freely available, and China keeps a tight lid on money going in and out of the country. Such capital controls and limited transparency in Chinese financial markets means that China still lacks the deep and free financial markets that are needed to make the yuan a major global currency.
To achieve truly global status, the yuan must be freely available for cross-border investment and not merely serve as a payment medium to accommodate trade. But the war in Ukraine has made it possible for the yuan to finally join the ranks of the dollar and euro — even if the volumes are not there yet. And any US policy decision that undermines the prestige and strength of US institutions – such as the recent drama over raising the debt ceiling, which brought the government to the brink of default – will accelerate the rise of the yuan and the decline of the dollar.
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