When the West imposed sanctions on Russia for its large-scale invasion of Ukraine, it blocked the Kremlin’s ability to trade in U.S. dollars, euros and other currencies. Russian banks were blocked from the SWIFT international payment messaging system and the central bank’s foreign exchange reserves were frozen. That forced Moscow to move its remaining reserves into currencies not controlled by the West, including the Chinese renminbi (RMB), whose main unit of measurement is the yuan.
The Kremlin’s energy deals with China, to make up for lost revenue due to a lack of European buyers of Russian oil and gas, have helped international transactions in yuan reach a record high, according to the British business daily Financial Times (FT)citing data from China’s State Administration of Foreign Exchange (SAFE).
One third more transactions in yuan
The number of bilateral transactions using the Chinese currency rose by a third in July to 53%, up from 40% in the same month in 2021. In 2010, 80% of China’s foreign trade was conducted in dollars, the report said. FTbut that figure has been halved since Western sanctions against Russia came into force. Over the same period, foreign trade in yuan has grown from almost zero to more than half of all transactions.
“Trading in the yuan is convenient for both Russia and China,” Maia Nikoladze, associate director of the Center for Geoeconomics at the Atlantic Council think tank, told DW. “Russia does not have too many currency alternatives, while China benefits from exerting greater economic influence over Moscow and is also moving toward internationalizing the yuan.”
Globally, however, the yuan is used for less than 7% of all foreign exchange transactions, compared with 88% for the dollar, according to the Dollar Dominance Monitor of the Washington-based Atlantic Council. The tracker found that 54% of export turnover is still done in dollars, compared with 4% in yuan.
Other BRICS watch China-Russia trade
Trading in yuan is benefiting from bilateral agreements between Moscow and Beijing, which led Russia to increase its holdings of the Chinese currency as part of its foreign exchange reserves. A currency swap agreement (swap) allows Russian banks to access liquidity in yuan. Russian financial institutions have also begun issuing yuan-denominated bonds.
Other countries, particularly those in the BRICS group, are keenly watching the rise in yuan transactions. Their leaders have floated the idea of a shared currency, to create a multipolar financial system and less reliance on the dollar.
According to Hanns Günther Hilpert, a senior fellow at the German Institute for International and Security Affairs (SWP), many countries in the Global South are “concerned” by the West’s moves to freeze Russian reserves. “Maybe they will have a problem with the US in the future and their reserves could also be frozen. That’s why these countries are moving away from the dollar,” he told DW.
U.S. Republican presidential candidate Donald Trump sees de-dollarization as such a threat to American hegemony that he threatened at a recent campaign rally to hit countries that reject the currency with 100% tariffs.
Saudi Arabia, Brazil and Argentina following in Russia’s footsteps
Beijing has struck deals with several countries to boost trade in yuan. Saudi Arabia, one of the largest oil exporters to China, signed a swap three-year foreign exchange deal with Beijing last November, worth the equivalent of $6.93 billion (6.26 billion euros).
That deal marked a significant potential shift in global energy markets, which have traditionally been dominated by the U.S. dollar. While the yuan is unlikely to be adopted for all Saudi oil sales anytime soon, the agreement allows both countries to test the waters without disrupting existing trading practices.
“Saudi Arabia is selling oil and gas to China. They get renminbi, which they can use to buy Chinese goods or invest in China, which the Saudis have already done. It’s a barter trade,” Hilpert said.
Countries including Brazil, Iran, Pakistan, Nigeria, Argentina and Turkey have also agreed to trade more in yuan. Iran is being forced further into China’s sphere of influence by heavy Western sanctions. Chinese refiners bought 90 percent of Iran’s exported oil last year, according to tanker-tracking data from trade analytics firm Kpler. Iran receives payments for its oil in yuan through small Chinese banks.
Argentina, grappling with a brutal economic crisis, faces a severe shortage of U.S. dollars to pay for its imports, service its debt and stabilize the Argentine peso. By settling more of its trade with China in yuan, the Latin American country can conserve those dollars and reduce the pressure on its other foreign currency reserves.
Capital controls slow the rise of the yuan
Despite Beijing’s steps to internationalize, the Chinese currency is still not fully convertible against other world currencies, something experts say is vital for it to become a reserve currency. Beijing maintains controls that restrict the free flow of capital in and out of the country.
As well as protecting the Communist Party’s iron grip on power, Chinese leaders are concerned about a repeat of the 1997/98 Asian financial crisis, in which Wall Street bet against several Asian currencies because of their respective countries’ heavy debt burdens, triggering a massive flight of capital.
Hilpert believes that becoming a fully convertible currency “comes at a price”, which will be political and economic instability. “The renminbi would then be subject to currency speculation, something the Chinese fear. They have seen what happened in Thailand and South Korea,” he said. At the height of the Asian crisis in the late 1990s, the Thai baht and the Korean won lost more than half their value against the dollar and both countries, along with Indonesia, were forced to request a bailout from the International Monetary Fund (IMF).
Another benefit of Beijing’s yuan restrictions is having the flexibility to devalue the currency to boost exports during slowing economic growth. Chinese leaders did so in 2015, and then again during the COVID-19 pandemic. There is now speculation that another sharp devaluation could be on the way.
Xi wants China to be a “financial power”
While the dollar’s role as the world’s reserve currency is seen as secure in the short to medium term, Chinese President Xi Jinping reiterated in January his ambition for China to become a “financial powerhouse.”
Asia’s largest economy faces many challenges as it attempts to steer the world toward a multipolar monetary system. These include high levels of corporate, household and local government debt, a worsening housing crisis and opaque shadow banking system, and ongoing trade and geopolitical tensions with the West and Asian neighbors.
Hilpert believes China is not truly integrated with the global financial system because it has “many inefficiencies,” including highly subsidized state-owned enterprises and a rudimentary domestic financial system: “If you want to become a major economic power, this is not the right strategy.”
(rml/ers)