China is accelerating efforts to decrease its dependence on the US dollar in global trade and finance, a move made to protect it from similar sanctions leveled against Russia. This approach is termed de-dollarization, which includes raising the use of Chinese Yuan (CNY) in international transactions and making it a reserve currency.
This has underscored risks associated with a dollar-dominated financial system as well as increased geopolitical tensions between China and the US alongside sanctions imposed on Russia after the invasion of Ukraine. Beijing now wants to reduce these risks by elevating yuan’s stability over other options.
However, China has also been making substantial progress in its de-dollarization drive, according to Business Insider. For instance, it has signed agreements with several nations that will see trades settled in yuan instead of dollars. This has included deals with Russia that is increasingly dependent on the yuan due to Western sanctions. “Due to western imposed sanctions, Russia turned more and more into using Yuan for payments,” says Business Insider citing the report.
Additionally, China is encouraging local businesses to invoice transactions in Yuan when conducting international trade while also lobbying for the inclusion of Yuan into foreign exchange reserves of other countries. The Belt and Road Initiative has seen China develop many infrastructure projects across Asia, Africa and Europe that are funded in Yuan.
In terms of finance, China has been expanding access to yuan-denominated assets as well as upgrading infrastructure for cross-border yuan payments. The set-up of Cross-Border Interbank Payment System (CIPS) serves this purpose by providing an alternative network compared to SWIFT used predominantly for international dollar settlement.
Nevertheless, despite all these strategies; dollar remains supreme among global currencies accounting for a big chunk of worldwide trade volumes and central banks’ reserves respectively. However, some analysts believe that persistent push towards de-dollarization from china can gradually shake off such balance. According to one specialist quoted in this report: “Although still small compared with the US dollar’s role in global payments, the Yuan has been steadily gaining ground.”
China’s effort towards de-dollarization is part of a larger plan to ensure that its economic independence is maintained, and its geopolitical influence strengthened. China wants to protect its economy from external shocks while at the same time increasing its role in global finance by reducing dollar dependence.
