Commentary
The internationalization of the yuan is not meeting China’s objectives, as its limited convertibility and usability are hindering its progress compared to the dollar. This restricts its usage primarily to heavily sanctioned countries like Russia, which have few alternatives.
Since 2021, the share of global trade settled in yuan has increased from around 2–3 percent to
approximately 4.3 percent. Despite this growth, the yuan still significantly lags behind the U.S. dollar (47 percent) and the euro (23 percent) in trade settlement. The growth is largely attributed to China’s expanding trade with Russia, as both countries use the yuan to circumvent U.S. dollar sanctions.
The Chinese state media outlet Global Times inaccurately reported that “the yuan’s settlement share in global trade hit a record of 24 percent.” In reality, the yuan does not represent 24 percent of global trade settlement. The accurate information is that China settled 24 percent of its own international trade in yuan, which equates to less than 5 percent of global trade being settled in yuan.
Trade settled in yuan between Russia and China has increased significantly but remains a small portion of the total global market. For instance, in 2023, trade between the two countries amounted to
approximately $240 billion, with about $68.7 billion settled in yuan. However, concerns about
secondary sanctions may diminish this trade and the use of the yuan. Chinese banks are increasingly scrutinizing these transactions, often identifying Russian entities on
U.S. sanctions lists, leading to hesitation in continuing transactions.
Delays resulting from heightened scrutiny are causing Russian companies to
cancel deals with Chinese firms and banks. This modest increase in yuan usage by a country with limited alternatives is now at risk, underscoring the unlikelihood of the yuan challenging the dollar as the global currency.
Trade settlement is just one aspect of internationalization; the composition of foreign currency reserves is another crucial factor to consider. The U.S. dollar
comprises 58 percent of all foreign reserves held by central banks globally, while the yuan only represents 2.3 percent. Furthermore, the dollar’s dominance is underestimated due to the International Monetary Fund’s
Special Drawing Rights (SDRs).
Central banks hold SDRs alongside various currencies, with the dollar accounting for over 43 percent of the SDR basket and the yuan only 12 percent. This results in increased indirect exposure to the dollar, indicating that the dollar’s dominance in global reserves is more significant than indicated by direct dollar holdings alone.
Foreign exchange trading volume is a critical metric for measuring currency usage: the U.S. dollar is involved in 88 percent of all trading pairs, while the yuan is only present in 7 percent. In trade financing, the yuan has seen a rise to 6 percent, potentially due to China’s low interest rates. Conversely, despite higher U.S. interest rates, the dollar dominates with
84 percent of global trade financing. This preference for dollar financing among traders, even with higher rates, underscores the market’s avoidance of the yuan.
Significant obstacles to the yuan’s internationalization persist, including Beijing’s control over its value, which limits its market influence. Additionally, the yuan’s restricted convertibility and usability impede its global expansion, while the dollar’s dominance remains robust, particularly due to the pricing of oil in USD.
Discussions between Riyadh and Beijing regarding China paying for
Saudi oil in yuan to enhance its internationalization face significant challenges. Any substantial shift in this direction could take decades. For exporters like Saudi Arabia, acceptance of the yuan depends on its practicality. Given the yuan’s limited acceptance in global trade and finance, oil exporters face currency risks and expenses when utilizing it. Furthermore, with the Saudi currency pegged to the dollar, Riyadh has little incentive to diminish the dollar’s usability or value.
Chinese Communist Party (CCP) leader Xi Jinping envisions a potential shift in this situation in the future. His visit to Saudi Arabia in December 2022 marked a new phase in relations, broadening beyond oil to a more comprehensive partnership. Long-term initiatives like Saudi Arabia’s
Vision 2030 aim to strengthen institutional, financial, and cultural ties. However, Saudi Arabia is the largest recipient of
foreign military sales from the United States, with an understanding that Washington provides weaponry and
military protection as long as oil is
priced in dollars. Transitioning to the yuan would not only result in financial implications but could also impact this critical defense relationship.
In summary, the growth in yuan usage for trade settlement has primarily been driven by increased trade between Russia and China, which is now jeopardized by secondary sanctions. Most countries, apart from Russia, are hesitant to adopt or hold the yuan due to its restricted convertibility, usability, and Beijing’s control over exchange rates. Even during periods of high U.S. interest rates, traders still favored dollar financing. Additionally, anticipated
U.S. rate cuts are likely to make dollar financing even more appealing.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
