[Global Focus] China Moves Resource-Rich Countries in 'De-Dollarization Alliance'

[New Currency War] Yuan Threatening the Dollar

Unlike the Western bloc, including the United States and Europe, which is showing anti-globalization movements recently, China is accelerating globalization. In particular, through unprecedentedly extensive summit diplomacy, China is strengthening relations with resource-rich countries and further attempting to isolate the United States. Following China's moves, the influence of the yuan in the international community has also increased. As repeated interest rate hikes have deepened global inflation, countries exhausted by the burden of a strong dollar on their economies are turning their attention to the yuan as an alternative currency. Whether the yuan can challenge the dollar hegemony has drawn the attention of countries to the US-China confrontation in the currency market.

China's Share of Yuan in International Transactions Reaches 48%
Surpasses Dollar Share for the First Time
Yuan Settlement Accelerates Centered on Resource-Rich Countries

According to an analysis of statistics from China's State Administration of Foreign Exchange (SAFE) by Bloomberg Intelligence, an economic research institute under Bloomberg, the share of the yuan in China's international transactions has surpassed the dollar (47%) for the first time, reaching 48%. This figure was calculated including all types of transactions such as foreign trade and securities transactions between China's mainland and Hong Kong capital markets.

Russia, excluded from the dollar payment network SWIFT (Society for Worldwide Interbank Financial Telecommunication) after initiating the war, is taking the lead in increasing the yuan's presence on the front line of de-dollarization. In March, yuan-ruble transactions accounted for 39% of Russia's currency market transactions, surpassing the dollar-ruble share of 34%. At the end of last year, Russia even announced plans to establish a sovereign wealth fund including up to 60% yuan assets.

The rapid spread of yuan settlements centered on resource-rich countries is causing further concern for the United States. In March, China issued its first yuan loan to Saudi Arabia's state-owned bank, and China National Offshore Oil Corporation (CNOOC), a Chinese state-owned energy importer, purchased 65,000 tons of liquefied natural gas (LNG) from France's TotalEnergies sourced from the United Arab Emirates (UAE), paying in yuan. This is known as the first case where yuan was used instead of the dollar in LNG transactions.

Brazil, the largest resource-rich country in South America, has also joined the de-dollarization movement. In February, the Central Bank of Brazil signed a memorandum of understanding with the People's Bank of China to establish a yuan clearing bank in Brazil. A yuan clearing bank is responsible for clearing yuan settlement payments outside mainland China. The People's Bank of China has designated 31 banks in 29 countries so far. Brazilian President Luiz In?cio Lula da Silva, during his recent visit to China, stated, "Why can't we trade in our own currency? We must end the situation where the dollar dominates world trade," openly expressing hostility toward dollar hegemony and clearly siding with China.

Additionally, Argentina expressed its intention this month to pay for imports from China in yuan instead of dollars, and Bangladesh approved yuan payments worth approximately $318 million (about 419.8 billion KRW) to settle part of a Russian loan used for nuclear power plant development. It is rare for yuan to be used in international transactions without China's involvement. Daniel McDowell, a China researcher at the Wilson Center think tank, explained, "Until now, the yuan has been used as a payment currency internationally only when one side of the transaction was China," adding, "Partners doing business with Russia now have no other practical alternatives."

While rapid changes in the international payment market are being detected, experts believe that the yuan is very unlikely to suddenly overthrow dollar hegemony and rapidly rise as a global reserve currency. According to SWIFT, as of March this year, the yuan's share in global payments was only 2.26%, ranking fifth after the US dollar (41.74%), the European euro (32.64%), and the British pound (4.78%). Although the yuan's share in trade finance doubled compared to last year, the figure itself is only 4.5%, which is not threatening.

This tally excludes transactions of the Cross-Border Interbank Payment System (CIPS), which China developed completely separately from SWIFT. Currently, the scale of CIPS is too small to be compared with SWIFT. It has about 1,304 members, which is only 12% of SWIFT's 11,000 members. The fact that most of its members (41.5%, 542 banks) are located in China also reveals its limitations.

Digital Yuan Project Accelerates
BNP Paribas Also Supports Transaction System
Full Effort to Establish in Public Servant Salary Payments

However, the aspect of 'blockization,' where the yuan absorbs part of the global financial order currently dominated by the dollar, is clearly emerging. Esther Lo, Chief Fund Manager at Amundi SA, predicted, "Since Russia's invasion of Ukraine, the fear of sanctions and the growing role of China as a lender have led to a tangible change, and the popularity of the yuan will continue to grow." Steven Zhen, co-founder of Yuri Zone SLJ Capital, evaluated, "Due to geopolitical tensions, it has become important for China to promote the international use of its currency," adding, "The US and China are waging war in investment and finance."

It is also noteworthy that China's national project to threaten dollar hegemony?the digital yuan initiative?is gaining momentum. China is the first among major countries to introduce a legal digital currency. Recently, BNP Paribas, France's largest banking group, announced cooperation with Chinese banks to support a system enabling Chinese corporate clients to conduct real-time transactions in digital yuan.

Chinese authorities distributed more than 180 million yuan (about 35 billion KRW) including consumer coupons through digital yuan pilot projects last year alone. The goal is to establish the digital yuan as the de facto standard digital currency within China by 2025. Some regions, such as Changshu City in Jiangsu Province, have decided to pay public servant salaries and state-owned enterprise employees' wages entirely in digital yuan. If successfully established and expanded to other regions, a significant portion of China's circulating currency could be replaced by the digital yuan.

There are also preconditions that must be addressed internally in China for the globalization of the yuan. The coercive attitude of retaliation through tariffs or boycotts whenever political or diplomatic issues arise has affected not only the overall Chinese economy but also trust in the yuan. The fact that the yuan is still subject to government capital controls also casts doubt on its qualification as a global reserve currency. The yuan exchange rate currently adheres to a managed floating exchange rate system determined by the People's Bank of China rather than the foreign exchange market.

This content was produced with the assistance of AI translation services.