Recent developments in international trade could threaten the US dollar. China’s yuan has been gaining more influence in the global currency landscape. This threat is no surprise given the strained relations between the US and China.
In March 2023, the yuan overtook the US dollar as the most used currency for cross-border transactions in China. Why is this alarming? [Source]
This is a sign that China is executing its plan to become less reliant on the US dollar, which has long dominated as an international currency.
The world’s reliance on the dollar, as well as the strength of the US economy, has allowed us to develop strategic partnerships and prevent aggressive behavior of other superpowers. A situation China is not comfortable with.
The rise of the yuan is being fueled by a coordinated effort from the Chinese government to internationalize its currency. The aim is to reduce reliance on the US dollar as a reserve currency and a medium of exchange. A process known as “de-dollarization”. [Source]
This is not a new development. President Donald Trump observed China’s efforts to gain advantage in international trade by manipulating its currency. This was one of the reasons why Trump started the US – China trade wars. [Source]
Trump’s tariffs were designed to reduce the trade deficit in 2018, which gave China an unfair advantage in international trade.
However, under President Biden’s administration the yuan started gaining serious traction on the international stage.
In light of Joe Biden’s presidential win, financial giants Goldman Sachs, Morgan Stanley, and Citi advised clients to buy the yuan, against a depreciating dollar. They predicted a decline in US – China trade tensions, a weakening dollar, and forecasted the rise of the yuan. [Source]
China’s efforts to make the yuan a reserve currency were inspired by Western sanctions against Russia and diminishing dollar reserves. A series of recent events underline China’s efforts.
In April 2023, Argentina’s government announced that it would start paying for Chinese imports in yuan instead of dollars. The plan is to pay around $1 billion of Chinese imports in yuan initially. This strategic shift was made as a result of Argentina’s record high inflation. [Source]
Meanwhile, China struck another major trade deal. The Shanghai Petroleum and Natural Gas Exchange saw China’s first yuan-settled Liquefied Natural Gas trade. A clear indication of China’s emphasis on settling oil and gas trades in yuan. [Source]
In February 2023, the yuan has replaced the US dollar as the most traded currency in Russia. In response to the sanctions, Russia has deepened its ties with China. [Source]
This includes the Russian Finance Ministry converting its market operations to the yuan instead of the dollar earlier in January 2023. As well as creating a new structure for the national wealth fund to hold 60% of its assets in yuan.
Remember, in March, the yuan also overtook the dollar as the most widely used currency for cross-border transactions in China.
Payments and receipts in yuan rose to a record $549.9 billion, reflecting efforts by the Chinese government to internationalize its currency. China is proud of this achievement, as it has long been promoting the use of yuan to settle cross-border trades. [Source]
It’s important to put things in perspective. The US dollar remains the world’s most widely held reserve currency and continues to dominate global trade.
The current leaders in the world currency reserve are the US dollar at 58.36%, the Euro at 20.47%, the Japanese yen at 5.51%, and the pound sterling at 4.95%. The yuan is at 2.69%. It still has to overtake the pound sterling. [Source]
However, the rising prominence of the yuan is indeed alarming. It indicates a shift in international trade currencies. The process of de-dollarization is gaining momentum more than ever.
This underscores the need for the US to maintain its economic competitiveness, uphold fiscal responsibility, and safeguard our financial systems.
President Biden’s efforts may not be sufficient. His focus is on promoting competitiveness in high-tech and computer chips manufacturing. This can lead to an escalation in our economic relationship with China. Pushing the Chinese government to maximize their efforts to reduce reliance on the US dollar. [Source]
The yuan’s gains against the US dollar are undeniable. We must ask ourselves if we are doing enough to defend our economic interests. It is crucial to be vigilant and critical of policies.