The dollar-yuan rivalry

This month Pakistan departed from its long-standing reliance on the US dollar for export payments, as it utilized the Chinese currency ‘yuan’ to pay for its inaugural government-to-government purchase of 100,000 tons of Russian crude oil. This marks Pakistan’s first international transactions in yuan.

Similarly, Argentina’s Secretary of State for Trade Matias Tombolini has announced on social media that his country has settled transactions worth a staggering $2.721 billion with China, using the Chinese yuan as the main instrument of transaction. Interestingly, 19 per cent of Argentina’s imports were settled in yuan in the months of April and May, and Tombolini asserts that this strategic shift will fortify their foreign exchange reserves and enhance their control over the economic landscape.

Consequently, on April 26, the government of Argentina announced the adoption of the yuan for settling trade in Chinese-imported goods, symbolizing a potent blow to the dollar’s dominance. The emergence of parallel currencies in international trade has fuelled the on-going heated debate on ‘de-dollarization’, with recent events providing additional ammunition to those critical of US dominance.

These two examples serve as poignant reminders of the growing trend towards alternative currencies and the potential erosion of the US dollar’s hegemonic status. As countries like Pakistan and Argentina embrace non-dollar payment systems in major transactions, the allure of diversification and reduced reliance on the American currency becomes all the more apparent. The global financial landscape is undergoing a subtle but significant transformation, one that challenges the long-standing supremacy of the US dollar.

Recently, in a significant development, China and Brazil unveiled a momentous agreement to conduct trade using their domestic currencies — the Chinese yuan and the Brazilian reals. This move underscores this new shift in trade links between the two economic powerhouses, with China holding the position of Brazil’s largest trading partner, as bilateral trade soared to a remarkable $150 billion in 2022. Also, China’s renminbi has secured a prominent place as Brazil’s second-largest international reserve currency. This strategic shift amplifies the expanding role of the renminbi/yuan on the global stage.

China’s recent decision to maintain its imports of crude oil and liquefied natural gas (LNG) from GCC countries, while conducting trade settlements in the yuan, has amplified this trend. The country carried out its inaugural cross-border settlement in yuan for LNG sourced from the UAE on March 28. This trend of exploring alternative currencies to reduce dependence on the dollar is gaining momentum, with transnational and regional organizations like BRICS and ASEAN actively considering such measures. The momentum of BRICS currencies is already very swift and enticing many countries to join the club. Additionally, Brazil and Argentina have proposed the establishment of a shared currency known as the sur to bolster regional trade and financial interactions.

These developments highlight two parallel phenomena: erosion of the US dollar’s dominance and emergence of parallel currencies, particularly the Chinese yuan. The dollar’s dominance over the global economy has been a topic of discussion since the collapse of the Bretton Woods system and the introduction of the euro by the European Union in 1999. The 2008-2009 financial crisis and its aftermath only heightened concerns about the sustainability of the dollar’s power. These fears have manifested in a trend towards de-dollarization, which has accelerated in recent years. Central banks around the world held less than 59 per cent of their foreign exchange reserves in dollars in the final quarter of 2022, down from 70 per cent in 2000.

While the euro’s share of global reserves has only modestly increased, from 18 per cent to just under 20 per cent, the Chinese renminbi (RMB/yuan) has rapidly gained traction during the same period — despite accounting for less than 3.0 per cent of global reserve currency holdings. Last year, in an effort to exert pressure on Russia, the US deployed a series of punitive measures, including freezing a substantial $300 billion of Russia’s foreign currency reserves and ousting major Russian banks from SWIFT, the international interbank messaging service.

However, these actions — rightly dubbed as the ‘weaponization’ of the dollar — inadvertently paved the way for the rise of alternative financial infrastructures spearheaded by Russia and China. In response, these countries have taken it upon themselves to establish their parallel financial systems, posing a formidable challenge to the global dominance of the US dollar.

The year-long Ukraine-Russia conflict has had profound repercussions, triggering significant transformations in the realms of economics, geopolitics and culture on a global scale. Yet, the most notable consequence has been the push towards a multipolar world, shifting away from the concentration of economic power within a singular hegemonic force. This trend, propelling a more diverse and balanced global power structure, is gathering momentum and exhibiting no signs of abatement.

The surge in the value of the dollar in recent years has sent shockwaves across the globe, causing widespread repercussions for nations worldwide. Among the most significant effects is the burden it places on countries with dollar-denominated debt, as the strengthening currency makes repayment increasingly costly. The fluctuations in the dollar’s value have disturbed the financial equation across the globe, with its current standing at an astonishing 10 per cent higher since the onset of the Ukraine conflict in February 2022, and a staggering 30 per cent higher than a decade ago. This trajectory has instilled caution in smaller economies, leading them to seek refuge in alternative currencies and fostering regional trade alliances.

The soaring dollar has imposed a heavy toll on countries reliant on imported essentials like fuel and food, rendering them exorbitantly expensive. The repercussions of this dollar dominance raise legitimate concerns for nations grappling with mounting economic burdens. Amid mounting concerns over the potential future use of US sanctions against them, countries like China are taking proactive steps to distance themselves from the US dollar, a move that analysts argue is crucial for safeguarding their economic stability. With China already targeted by US sanctions in sectors like semiconductor trade, the fear of further repercussions has intensified in Beijing. As a result, China is actively pursuing strategies to reduce its reliance on the dollar, a decision motivated by the imperative of preserving the seamless functioning of its economy in the face of potential challenges.

The ascent of China’s global economic influence poses a major challenge to the US dollar’s status as the world’s reserve currency, particularly with its recent forays into Middle Eastern markets, including the significant Saudi Arabian oil market. This venture has the potential to shift the balance in favour of widespread adoption of the yuan — being touted by Western media as ‘yuanization’.

China’s substantial purchases of US T-bills during the 2008 financial crisis temporarily bolstered the US economy, but this trend has since reversed. China’s reduced holdings of US debt — falling below $1 trillion — indicate a deliberate effort to minimize exposure to the dollar, especially in the face of escalating trade tensions. For obvious reasons, China is more determined than ever to free itself from its dollar dependence.

Though it is too difficult to predict when the yuan will be able to outcompete the US dollar, one thing is certain that the process of de-dollarization is picking up speed, much faster than the expectations of American financial managers.

The writer is a freelance contributor.