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Chinese yuan threatens US dollar dominance

31 Mar, 2023 - 00:03 0 Views
Chinese yuan threatens US dollar dominance Chinese Yuan threatening dominance of USD

eBusiness Weekly

Tapiwanashe Mangwiro and Malvin Nkomo

The dominance of US dollars in the global market is gradually becoming under threat by the Chinese yuan, a part of the basket of reserve currencies, judging by recent events.

The Yuan, also known as renminbi (RNM), become part of the International Monetary Fund’s (IMF) basket of reserve currencies in 2016 in a development that widely attracted negative comments from critics who argued that the currency then was far from meeting reserve currency criteria of being freely usable, or widely used to settle trade or widely traded in the global financial markets.

Prior to that, China, the world’s second — biggest economy had already started promoting the use of its currency globally, to reflect its geopolitical influence as well as to insulate the country from the United

States monetary and sanctions policy.

The country has also been pushing payments of oil and gas in Yuan to shore up the currency influence and to soften the dominance of the U.S. dollar in global trade.

This week, the Chinese National Oil Company and France’s TotalEnergies completed China’s first yuan-settled LNG trade through the Shanghai Petroleum and Natural Gas Exchange. About 65,000 tonnes of LNG imported from the UAE changed hands.

And in the face of western sanctions over its war in Ukraine, Russia embraced the Yuan as one of its main currencies, international trade, and some ordinary banking services.

Unfolding events

On Wednesday, China and Brazil struck yet another deal to trade in their own currencies instead of the US dollar, according to AFP, citing a statement from the Brazilian government.

China and Brazil are both members of BRICS, a grouping of five emerging economies that also includes India, South Africa, and Russia. According to Brazil, the agreement would reduce costs and spur greater bilateral trade and investment.

In 2009, China overtook the United States as Brazil’s largest trading partner.

It now accounts for more than a fifth of all of imports in the south American country.

On the other hand, China is Brazil’s largest export market, accounting for more than a third of all exports.

With oil, it has been difficult to penetrate because of the huge trading and hedging complex built around the dollar.

According to the Washington Post, progress there seems to be accelerating as sanctions expand, with Russia, Iran, and Venezuela now trading oil with China in yuan.

Nouriel Roubini, the economist who predicted the 2008 global financial crisis, said in January 2023:

“The dollar’s status as the world’s main reserve currency is in jeopardy.”

What does it mean for Zimbabwe?

Such moves have prompted a local debate on whether it is of benefit for Zimbabwe to adopt the Yuan given that most of the country’s biggest trading bloc was the BRICS.

Being part of the reserve currency, Zimbabwe does not need permission from China to adopt

Chinese yuan threatens US dollar dominance

Dr Reneth Mano, a Harare based economist said: “China mainly imports tobacco leaf, processed tobacco and chromium ore from Zimbabwe and over the past years China made major investments in the country’s infrastructure and mining projects which means that if the Yuan is adopted as the global reserve currency, Zimbabwe will be able to get the Yuan from the tobacco exports and as well use the same currency to finance international transactions with BRICS countries” he said.

Zimbabwe has seen an increase in trade with China since the advent of Covid-19, with exports in 2021 increasing to US$256 million from US$42 330 in 2020 at the peak of the pandemic. In 2022, according to Zimbabwe National Statistics Agency (ZimStat), exports to the country grew to US$676,6 million.

Economist Dr Prosper Chitambara said: “If we are to allow trade from China to be settled directly in Yuan, I believe it will be an attempt to improve access to foreign currency in the country.

“The central bank has been taking steps such as the auction to compensate for a dollar shortage in local markets which has caused outrage as there is the belief of undervaluation of the currency.”

However, renowned economist Prof Tony Hawkins said the move is risky given the democracy level of China.

“It will, however, take a long time to challenge the dollar, especially now that China’s economy and trade will likely grow at a slower pace than previous,” he said.

The current state of yuan in world trade

According to Swift data, the Yuan was the fifth most active currency for global payments by value in December 2022, but its share is still at a low 2,15 percent versus almost 42 percent for the dollar and 35 percent for the euro.

In terms of reserves, according to Forbes, some 70 central banks do hold Yuan in reserve, a much greater number than a few years ago, but still, according to the International Monetary Fund (IMF), these holdings amount to only 2,25 percent of the global total.

That figure falls short of the euro, for instance, which amounts to some 20,6 percent of these reserves or even the Yen, which amounts to 5,8 percent.

The yuan’s role certainly falls far short of the dollar, which amounts to about 59 percent of these reserves. As should be apparent from the trading proportions mentioned above, the dollar on strictly practical grounds should have a higher proportion of central bank reserves than it does.

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