China Takes the Yuan Global [UPSC Current Affairs]

China is putting the yuan front and centre in its fight back against the US’s unique influence over global money. In this article, you can read more about China taking its currency global and its implications for the world economy. This topic is relevant for the IAS exam economy and IR segments.

China’s Efforts to Promote the Yuan Over the Dollar

• China’s new deals: Over the last year (2022), President Xi Jinping’s government has been busy striking deals to broaden the currency’s use, with new renminbi-linked agreements stretching from Russia and Saudi Arabia to Brazil and even France. 
  • While the United States remains the world’s clear financial hegemon, these moves are assisting China in carving out a larger role in the international financial system. 
  • They arrive at a time when geopolitical tensions are rising and global trade is becoming an increasingly active battleground.
• New payment system: Efforts are being made to develop a new Russia-China payment system that would bypass SWIFT by integrating the Russian SPFS (System for Transfer of Financial Messages) and the Chinese CIPS (Cross-Border Interbank Payment System).
• New trading platforms: China intends to promote de-dollarisation through trading platforms and its digital currency. It has RMB trading centres in Hong Kong, Singapore, and Europe.
• Global Sovereign Digital Currency: In 2021, the People’s Bank of China proposed to the Bank for International Settlements a “Global Sovereign Digital Currency Governance” plan in order to influence global financial norms using its digital currency, the e-Yuan.
• Inclusion of yuan in SDR basket: In 2016, the International Monetary Fund (IMF) added Yuan to its SDR (Special Drawing Rights) basket.
  • However, China’s desire to de-dollarize will be hampered by the lack of full RMB convertibility.
• US-China rivalry: Antagonism between the two economic heavyweights has erupted over matters ranging from trade and Taiwan to TikTok and technology know-how. 
  • Sanctions on Russia have highlighted the US’s new willingness to weaponize the dollar. Together, they have done more to promote China’s yuan in the last year than Xi’s government has in the previous decade.
• Fight against slower growth: The increase is also a reaction to China’s changed position in the world economy as it emerges from the period of Covid lockdowns, with growth slower than it once was and the global movement for freer trade in retreat. 
  • This has prompted Beijing’s officials to step up efforts to turn the country — and, in particular, its yuan — into an alternative hub for international banking, commerce, and credit.
• Use of renminbi in trade transactions: The renminbi is increasingly being used in contracts for everything from oil to nickel, with the currency’s proportion of global trade finance tripling since the end of 2019. 
  • That is still a small percentage of global transactions, and the currency is tightly controlled by Chinese authorities. However, sanctions imposed on Moscow following its invasion of Ukraine have accelerated the pace. 
  • The yuan’s use in Russian export payments increased 32-fold in just one year.
• BRICS initiative: The BRICS group dominated by China is also considering introducing a new currency to ease commerce. 
  • The new financial accord might be visible as early as August ‘23, when the countries convene in South Africa for their annual summit.

What is De-dollarisation?

• The term “de-dollarisation” refers to the process of diminishing the dollar’s dominance in global markets. It is the process of replacing the US dollar as the currency for trading oil and/or other commodities, purchasing US dollars for forex reserves, bilateral trade agreements, and investing in dollar-denominated assets.
• The dollar’s leading role in the global economy gives the United States enormous influence over other economies. The United States has long utilised sanctions to achieve foreign policy objectives.
• The need to insulate the central banks of the countries from geopolitical concerns, where the role of the US dollar as a reserve currency can be used as an offensive weapon, is driving the de-dollarisation.

Challenges to Remove the Dollar as a Global Currency

• Not Fully Convertible: National currencies face a unique issue in that they are not fully convertible. Thus, despite the rise of alternative trading systems and multiple currency circulation systems, the dollar remains dominant.
• Currency Fluctuations: National currencies’ values can vary relative to the dollar, making it difficult for countries to plan their economic policies and corporations to make long-term investments.
• National Currencies’ Limited Use in International Trade: Because the dollar is widely used in international trade, national currencies find it difficult to compete. This can make it more difficult for countries to trade with one another and for enterprises to expand globally.
• Dependence on the Dollar: Many countries rely heavily on the dollar for trade and financial operations, making them subject to fluctuations in the dollar’s value as well as US government policies.
• Financial Instability: Because other countries are more vulnerable to financial crises, the dollar’s dominance in the international financial system can lead to financial instability in those countries.
• Monetary Sovereignty: The dollar’s hegemonic status inhibits other countries’ monetary sovereignty by making it difficult for them to utilise monetary policy to stabilise their economies.

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