Since the end of World War II, the US dollar has been the world’s dominant reserve currency, with countries around the world needing to hold large amounts of dollars to facilitate trade and investment. However, recent developments suggest that the dollar’s position is increasingly under threat, with China actively working to promote the internationalization of the yuan and reduce reliance on the dollar.
The Rise of the Yuan
Over the last few years, China has signed over $582 billion worth of global currency settlement agreements with more than 40 countries and regions, including Russia, Venezuela, and the Middle East. The goal of these agreements is to promote the use of the yuan in international trade and protect against the weaponization of the dollar, which is often used as a tool of US foreign policy. To facilitate direct settlement, China is working to shield countries from the impact of US sanctions. As a result, the use of the yuan in global trade financing has increased from less than 2% in 2017 to 4.5% in 2023.
The CIPS System
One of the key drivers of the yuan’s rise has been the creation of the Chinese cross-border interbank payment system, or CIPS. This system has made it easier for foreign banks to conduct cross-border transactions in yuan, accelerating the internationalization process. Today, the SIPS has close to 1,366 participants from over 109 countries and regions, and has built a stable financial infrastructure and service platform for cross-border yuan settlement.
The Implications of the Yuan’s Rise
The increasing prominence of the yuan as a settlement currency not only provides countries with a viable alternative to the US dollar, but also strengthens their resilience against economic uncertainties and geopolitical tensions. By reducing their reliance on the dollar, countries can insulate themselves from the risks associated with fluctuations in the value of the dollar and sanctions imposed by the US.
Furthermore, the rise of the yuan has important implications for the global economy. The world has been dependent on the dollar for so long that it’s difficult to imagine anything else taking its place. However, if China continues to expand the reach of the SIPS and deepen financial cooperation with its trading partners, the global influence of the Chinese currency will continue to grow. While nothing of this magnitude would happen overnight, the era of the US dollar as an undisputed reserve currency may be coming to an end at some point in the not-too-distant future.
It is clear that the rise of the yuan and the decline of the dollar will have significant implications for the global economy. While the dollar is still the world’s dominant reserve currency, the increasing use of the yuan in international trade and investment suggests that this may not be the case for much longer. As countries around the world look to reduce their reliance on the dollar and insulate themselves from the risks associated with its dominance, the yuan is likely to become an increasingly important currency in the years to come.
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