Key Points
- Russia’s use of the yuan surged after sanctions, with 53% of its trade now in the Chinese currency.
- BRICS nations explore yuan alternatives to reduce reliance on the US dollar amid sanctions concerns.
- Saudi Arabia and China signed a deal to facilitate yuan-based oil trade, signaling a shift in energy markets.
- China’s capital controls limit yuan growth, preventing it from becoming a global reserve currency.
- Challenges to China’s financial ambitions include domestic debt issues and inefficiencies in its economic system.
The West’s economic sanctions against Russia, triggered by the full-scale invasion of Ukraine, have led to significant changes in global trade dynamics. Western powers inadvertently pushed Moscow into shifting towards alternative monetary systems by choking off Russia’s access to US dollars, euros, and other major currencies. Among these, the Chinese renminbi (RMB), whose unit is the yuan, has seen a remarkable rise in its usage. Blocked from SWIFT, the global payment system, and its foreign currency reserves frozen, Russia has turned to China to sustain its trade, particularly in the energy sector. The deepening relationship between the two nations has helped yuan transactions surge, marking a critical shift in global currency dynamics.
Russia’s Shift to the Yuan: A Third More Transactions
The bilateral trade between Russia and China has seen the yuan take center stage. According to recent data, the use of the Chinese currency in transactions grew by a third in just one year, increasing from 40% in July 2021 to a staggering 53% by July 2022. Before the Western sanctions, China conducted 80% of its outbound trade in dollars, which has now halved. In contrast, the yuan, previously almost negligible in Chinese foreign trade, now accounts for over half of China’s outbound transactions. This trend, driven by necessity on Russia’s part and China’s desire to further its economic influence, has made yuan-based transactions far more common in both nations.
What makes trading in yuan so appealing for both Russia and China? The answer lies in convenience. Russia has limited currency alternatives, and China gains a strategic advantage by strengthening its grip on Moscow’s economy. For China, the internationalization of the yuan has long been a goal, and this situation has provided the perfect opportunity to make significant strides toward that ambition. Yet, despite the surge in usage, the yuan remains far from dethroning the US dollar as the global currency of choice. Globally, less than 7% of foreign exchange transactions involve the yuan, compared to 88% for the dollar. It is clear that while the yuan’s rise is noteworthy, the dollar’s dominance remains intact—for now.
BRICS: A New Frontier for the Yuan?
The rise of the yuan has not gone unnoticed by other major economies, particularly those in the BRICS group, which includes Brazil, Russia, India, China, and South Africa. The shift towards yuan-based transactions in Russia, supported by currency swap agreements and the issuing of yuan-denominated bonds by Russian banks, is being watched closely by these nations. With many BRICS countries looking to reduce their dependency on the US dollar, the idea of a shared currency or a multipolar financial system has been floated. Such a system would give these countries greater autonomy in international trade and reduce the risks associated with relying heavily on Western currencies, especially in a geopolitical climate where sanctions and currency freezes are increasingly being used as tools of diplomacy.
The concern isn’t just limited to Russia. Other countries in the Global South have expressed worries that they, too, could face similar sanctions from Western powers, potentially freezing their reserves. This fear has prompted a gradual shift away from the dollar in favor of currencies like the yuan. The possibility of future tensions with the United States has become a growing consideration for these nations, leading them to explore new avenues to safeguard their economic security. While still in its early stages, this trend towards de-dollarisation represents a potential long-term shift in the global financial system.
The Petroyuan: Saudi Arabia and Beyond
China has also expanded its currency’s reach through strategic agreements with other nations, particularly in the energy sector. In November 2022, China and Saudi Arabia signed a three-year currency swap deal worth nearly $7 billion. As one of the largest oil exporters to China, Saudi Arabia’s move towards accepting yuan for its energy exports marks a potentially transformative moment in global trade. Traditionally, the US dollar has dominated energy markets, giving rise to the term “Petrodollar.” While a full-scale transition to yuan pricing for Saudi oil sales remains unlikely in the short term, this deal allows both nations to test the waters and explore alternative trade mechanisms.
Saudi Arabia’s willingness to engage in yuan-denominated transactions reflects a broader trend of countries diversifying their currency portfolios. Similar shifts occur in other nations, including Brazil, Iran, Argentina, and Turkey. In Iran, for example, Western sanctions have made it increasingly reliant on Chinese buyers, with most of its oil exports being paid in yuan. Similarly, Argentina, facing a severe economic crisis, has turned to the yuan to preserve its dwindling US dollar reserves. By settling more of its trade with China in yuan, Argentina can alleviate some of the pressure on its foreign currency reserves, allowing it to focus on stabilizing its domestic economy.
Capital Controls: A Barrier to the Yuan’s Global Ambitions
Despite the rise of the yuan in certain parts of the world, significant hurdles still prevent it from becoming a truly global currency. Chief among these is China’s strict capital controls, which limit the free flow of money in and out of the country. For the yuan to become a reserve currency, it must become fully convertible with other global currencies. However, Beijing has shown little willingness to relax its controls, viewing them as essential to maintaining domestic economic stability and safeguarding against the risks of currency speculation.
China’s caution in this area is not unfounded. The Asian Financial Crisis of 1997-1998 serves as a stark reminder of the dangers associated with capital flight. During this period, several Asian nations, including Thailand and South Korea, saw their currencies lose significant value, forcing them to seek bailouts from the International Monetary Fund (IMF). For China, lifting capital controls could lead to a repeat of such events, undermining the Communist Party’s grip on power and destabilizing the economy. Thus, while the yuan may be making gains, Beijing still tightly controls its growth.
The Long Road Ahead: Challenges for China’s Financial Future
While Chinese President Xi Jinping has made clear his ambition to transform China into a global “financial power,” the road to achieving this goal is fraught with challenges. China’s economy faces many issues, from mounting corporate, household, and government debt to a growing real estate crisis. Furthermore, China’s financial system is riddled with inefficiencies, particularly among state-owned enterprises, which are heavily subsidized and contribute to an opaque shadow banking system. These factors and ongoing geopolitical tensions present significant obstacles to China’s quest for financial dominance.
Despite these challenges, China remains committed to expanding the yuan’s role in global trade. However, unless Beijing is willing to address its domestic economic issues and make its currency fully convertible, the yuan is unlikely to soon displace the US dollar as the world’s dominant currency. Nevertheless, the yuan’s rise in bilateral trade with Russia and other nations signals a growing desire for a more multipolar financial system. While the dollar remains king for now, the world is watching closely as the yuan slowly but indeed carves out a space for itself on the global stage.
