Commentary
The Chinese regime is falling short in its goal of internationalizing the yuan. Because the yuan’s limited convertibility leaves it far behind the dollar, it is mainly used only in heavily sanctioned countries like Russia, which have few other options.
Since 2021, the share of global trade settled in yuan has grown from around 2 to 3 percent to approximately 4.3 percent. While this represents a notable increase in percentage terms, the yuan still lags significantly behind the U.S. dollar (47 percent) and the euro (23 percent) in overall trade settlement. Much of this growth is attributed to China’s expanding trade with Russia, as both countries use the yuan to bypass sanctions on U.S. dollar transactions.
Chinese state media Global Times claimed that in the first seven months of 2024, “the yuan’s settlement share in global trade hit a record of 24 percent.” This statement was misleading. In reality, the yuan does not account for 24 percent of global trade settlement. What actually happened is that China settled 24 percent of its own international trade in yuan. Given China’s trade volume, this equates to less than 5 percent of global trade being settled in yuan.
The percentage of trade between Russia and China that is settled in yuan has grown significantly, but remains a small share of the total global market. For example, in 2023, trade between the two nations reached approximately $240 billion, with around $68.7 billion settled in yuan. However, fears of secondary sanctions are likely to reduce this trade and the yuan’s use. Chinese banks are increasingly scrutinizing these transactions. They often find their Russian counterparts or customers on U.S. sanctions lists, which makes them hesitant to proceed.
Delays from increased scrutiny are leading Russian companies to cancel deals with Chinese firms and banks. Even this modest rise in yuan usage by a country with limited options is now at risk, further underscoring how unlikely it is for the yuan to challenge the dollar as the global currency.
Trade settlement is just one measure of internationalization; another key factor is the composition of foreign currency reserves. The U.S. dollar makes up 58 percent of all foreign reserves held by central banks globally, while the yuan accounts for only 2.3 percent. As much as the U.S. dollar already dominates global reserves, its share is actually undercounted because of the International Monetary Fund’s special drawing rights (SDRs).
SDRs are held by central banks alongside U.S. dollars and other currencies. But since the dollar accounts for more than 43 percent of the SDR basket while the yuan accounts for only 12 percent, holding SDRs further increases indirect exposure to the dollar. This means the true dominance of the U.S. dollar in global reserves is even greater than it appears when looking only at directly held dollars.
Foreign exchange trading volume is another key measure of currency usage: The U.S. dollar appears in 88 percent of all trading pairs, while the yuan accounts for just 7 percent. In trade financing, the yuan has risen to 6 percent, likely due to China’s low interest rates. Meanwhile, despite high U.S. interest rates, the dollar dominates, accounting for 84 percent of global trade financing. This shows that traders prefer paying higher rates to hold dollars, avoiding the yuan even at a discount.
Major barriers to the yuan’s internationalization persist, including Beijing’s control over its value, which limits market influence. Additionally, the yuan’s restricted convertibility and usability hamper its global reach, while the dollar’s dominance remains strong, largely due to oil being priced in dollars.
The Beijing regime has discussed with the Saudi Arabian government the possibility of paying for Saudi oil in yuan to boost the currency’s internationalization. However, the yuan-based oil trade faces significant hurdles, and any major shift could take decades. For exporters such as Saudi Arabia, accepting the yuan depends on the ability to use it effectively. Since the yuan isn’t widely accepted in global trade or finance, oil exporters face currency risks and costs in spending it. Additionally, with the Saudi currency pegged to the dollar, Riyadh has little incentive to weaken the dollar’s usability or value.
Chinese Communist Party (CCP) leader Xi Jinping hopes this dynamic may change in the future. His December 2022 visit to Saudi Arabia marked a new phase in relations, expanding beyond oil to a broader partnership. Long-term projects like Saudi Arabia’s Vision 2030 are meant to strengthen institutional, financial, and cultural ties. However, Saudi Arabia is the United States’ largest foreign military sales customer. There is an understanding that Washington will provide Saudi Arabia with weapons and military protection as long as oil is priced in dollars. Shifting to the yuan would mean more than just financial losses—it could also affect this critical defense relationship.
In conclusion, the rise in yuan use for trade settlement has largely been driven by increased trade between Russia and China, which is now at risk due to secondary sanctions. Beyond Russia, most countries are reluctant to accept or hold the yuan because of its limited convertibility, its limited usability, and the CCP’s partial control of exchange rates. Even when U.S. interest rates were at their highest in decades, traders still preferred dollar financing. Moreover, expected U.S. rate cuts will only make dollar financing more attractive.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
