- China’s effort to de-dollarize and boost the value of the yuan face five big challenges.
- Obstacles include China’s capital controls and the longstanding popularity of the dollar, one scholar says.
- China’s yuan accounted for just 3% of SWIFT transactions last year, compared to the dollar’s 48%.
China’s attempt to dedollarize is set to run into some key obstacles, according to the Carnegie Endowment for International Peace.
Robert Greene, a scholar at the Washington, DC-based think tank, pointed to China’s efforts over the past year to boost the presence of the yuan in global trade, while it and other BRICS countries have been attempting phase out their use of the dollar.
China has struck yuan trading and currency swap deals with other countries, like Russia and Saudi Arabia, and China’s own banks have been buying up the yuan to boost its value, Reuters originally reported.
But the yuan is still a long ways from overtaking the dollar in any meaningful way, and there are major roadblocks that could limit its use in world trade, Greene said.
There’s a limited supply of yuan outside of China
There isn’t a lot of yuan available outside of China. That’s partly due to China’s capital controls, which have limited offshore access to its currency, the Banqe de France said in a 2022 working paper.
China’s yuan accounted for 2.45% of foreign central bank reserves in the second quarter of 2023, according to International Monetary Fund data. That’s a tiny fraction compared to the share of the dollar, which accounted for 59% of all central bank reserves that quarter.
The dollar still dominates cross-border transactions
China’s yuan accounted for one side of 3.47% of SWIFT transactions in August 2023. That’s dwarfed by the greenback, which accounted for one side of 48% of global SWIFT transactions. Meanwhile, 47% of China’s own cross-border payments were denominated in the dollar in 2023, though only around 17% of China’s exports head to the US, according to 2021 trade data.
Experts say the dollar’s dominance in financial markets is difficult to diminish. That’s because of the greenback’s long-standing reputation of safety, which becomes stronger the more people use the dollar.
“The frequent usage of the dollar in trade reinforces its use in finance. This dynamic contributes to the dollar’s global dominance as a standard of deferred payment,” Greene said.
China’s frail economy and capital controls could limit use of the yuan
Firms and institutions could be deterred from holding the yuan considering China’s precarious economic position. The nation has struggled since dialing back its zero-COVID policies, and is now battling a handful of economic pressures, including anemic consumer demand, a collapsed property sector, and long-running demographic issues.
China is also notorious for imposing strict capital controls on its currency, which limits the amount of yuan that can be taken in and out of the country. Those rules decrease the liquidity of the yuan, which can make alternatives like the dollar more attractive to currency holders, Greene said.
“It remains to be seen the extent to which Chinese policies restricting renminbi convertibility will limit the currency’s growing use in cross-border trade and finance,” he added.
China’s financial system needs the dollar
China itself also needs the US dollar, since its currency system is pegged to the greenback. The majority of yuan trading is done against the US dollar, and in 2022, around 50% of China’s foreign exchange reserves were likely made up of dollars, according to an analysis from the Council on Foreign Relations.
“Currency internationalization without full capital account liberalization thus requires the RMB to be backed by dollar reserves, which the PBoC consequently will continue to hold and use. Hence we do not foresee RMB internationalization as supplanting dollar dominance,” the researchers said.
The US could address dollar shortages in emerging markets
Emerging markets have been driven to use the yuan partly because of a severe shortage in dollars. Nations could eventually shift away from China’s renminbi if the US addressed those dollar shortages, which are affecting places like Argentina, Egypt, and Ethiopia. The issue is also prevalent in markets across Africa, South Asia, and South America, Greene said.
“In certain emerging markets, interest in and use of the renminbi seems to be occurring as a direct response to dollar shortages,” he said, adding that US policymakers needed to focus on why other economies were being driven to China for their currency needs.
