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Yuan Rising: China’s Currency Gains Global Traction Amid Dedollarization Efforts

Despite its economic challenges, China’s strategic push to globalize its currency, the yuan (renminbi), is showing promising results. In a notable shift in the landscape of global finance, the yuan’s share in global payments has risen significantly, from 1.9% in January to 3.6% in October, according to a Natixis chief economist. This progress in 2023 marks a key milestone in China’s broader goal of reducing global dependence on the US dollar.

Beijing’s active promotion of the yuan in international trade and investment deals is part of a larger “dedollarization” trend, where nations are increasingly seeking alternatives to the dollar-dominated financial system. While the yuan’s share of global payments remains modest compared to 47.25% for the US dollar and 23.36% for the euro, the upward trajectory signals a potential shift in global currency dynamics.

The People’s Bank of China has reported a surge in yuan-denominated transactions, with approximately 30% of China’s foreign trade now settled in yuan. This change is driven by several factors, including geopolitical considerations. Following the US sanctions on Russia in 2022, China’s interest in moving away from dollar dependency has intensified, accelerating efforts to promote yuan usage in international deals.

To further the yuan’s global reach, China has increased its share in total cross-border lending and established bilateral currency swaps with over 30 central banks, including those of Saudi Arabia and Argentina. These swap lines, previously inactive, are now being utilized, with Argentina notably withdrawing the equivalent of $1 billion in yuan to manage IMF repayments.

However, it’s important to note that China’s independent international payment system, which is less transparent, could mean that the yuan’s gains in cross-border payments are potentially even higher than reported.

Despite these strides in global finance, the yuan’s advancement as an investment currency lags. Foreign investment in China’s onshore markets has decreased, highlighting the complexities faced by investors interested in yuan assets due to the currency’s limited convertibility.

China’s journey to elevate the yuan’s status in global finance reflects its growing economic influence and the push for a more multi-currency global financial system. As the economist suggests, while China’s economic dominance facilitates the yuan’s rise, the lack of currency convertibility remains a significant barrier to its full acceptance as a global investment currency.