Can the Yuan Replace the Dollar?


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Can the Yuan Replace the Dollar?

BRICS alliance aims to reduce US dollar hegemony by creating a common currency. Recent shift to yuan in Russia marks significant development.

BRICS to Reduce US Dollar Hegemony

BRICS, comprising Brazil, Russia, India, China, and South Africa, is working on creating a common currency in an attempt to reduce US dollar hegemony. This de-dollarisation movement has been receiving support from Russia and China, which are calling for a halt to the dollar’s dominance in the world. The proponents of de-dollarisation believe that it could help mitigate the impact of economic and political changes in the US on other economies. 

US Dollar Decreases in Central Banks

In recent years, central banks have been holding fewer US dollars as reserves, and countries such as India and China have started trading with Russia in currencies like rupees and yuan instead of the US dollar. India has also been trying to move away from the US dollar by enabling trade in Indian rupees. 

Dethroning the King of Currency

The US dollar has been called the king of currency ever since it became the official reserve currency of the world in 1944. Since then, it has been used as a tool to achieve foreign policy goals, which has given the US a disproportionate amount of influence over other economies. However, countries like Russia and China would like to reduce US dollar hegemony, which is why they are calling for de-dollarisation. This process refers to reducing the dollar’s dominance in global markets and substituting it with other currencies for trading commodities like oil.

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Reducing Dependence on the US Dollar

The proponents of de-dollarisation argue that reducing dependence on the US dollar could help mitigate the impact of economic and political changes in the US on other economies. Countries could reduce their exposure to currency fluctuations and interest rate changes, which would improve economic stability and reduce the risk of financial crises. This movement has been gaining momentum in recent years, especially in 2022, when the International Monetary Fund noted that central banks are not holding the US dollar as reserves in the same quantities as before.

US Uses Sanctions as a Tool to Achieve Foreign Policy Goals

Western governments froze $300 billion of Russia’s foreign currency reserves last year, roughly half the total, to punish it for its invasion of Ukraine. As a result, Russia’s banks were expelled from the Swift international payments system. Countries willing to continue to trade with Russia, like India and China, have started doing so in currencies like rupees and yuan instead of the US dollar, which has triggered talk of de-dollarisation. 

Efforts to Move Away from the US Dollar

Brazil and China have also started trading with each other in yuan, helping establish the Chinese renminbi as a potential challenger to the US dollar. India has also been trying to move away from the US dollar by enabling trade in Indian rupees, which may become a global reserve currency over time.

Yuan Replacing Dollar as Most Traded Currency in Russia

The relationship between China and Russia has been strengthening over the years, particularly since the West imposed sanctions against Russia in 2022. In a significant move, the yuan has now replaced the US dollar as the most traded currency in Russia. This comes after sanctions impacted the ability of Russian banks to make cross-border transfers in dollars and other currencies of countries branded “unfriendly” by the Kremlin. Raiffeisen Bank International AG, which remains one of the main conduits for international payments in the country, was among the banks that came under elevated pressure from European and US authorities.

China and Russia Deepen Ties as Sanctions Take Effect

As the world’s second-largest economy, China has been taking bold steps to strengthen its economy, including promoting the use of its currency overseas. The yuan’s trading volume on the Russian market was negligible before the Ukraine invasion, but it has now surpassed the dollar in monthly trading volume, as reported by Bloomberg. In March 2023, Chinese President Xi Jinping made Moscow his first visit abroad after his re-election, promising the Kremlin expanded cooperation in the areas of trade, investment, supply chains, mega projects, energy, and hi-tech.

The Russian Finance Ministry Converts Market Operations to Yuan

Sweeping sanctions have forced the Kremlin and Russian companies to switch their foreign-trade transactions from the dollar and euro to currencies of countries that have declined to join any restrictions. The Finance Ministry has converted its market operations to the yuan instead of the dollar earlier this year, and the national wealth fund now holds 60% of its assets in yuan. The Bank of Russia regularly calls on companies and citizens to move their assets into the ruble or “friendly” currencies to avoid the risk of having them blocked or frozen.

The Rise of BRICS Alliance and the Yuan | Russia Deepens Its Ties with China

Despite China’s efforts to promote the yuan’s usage overseas, global foreign-exchange reserves allocation in the yuan accounted for only about 2.7% of the total amount by the end of last year, according to IMF data. This is down from the peak of 2.9% in the first quarter of the year. China’s capital account controls, as well as geopolitical concerns among global investors, remain a barrier.

Russia Increases Trading Volume to Yuan

The shift in Russia’s trading volume from the dollar to the yuan is a significant development, especially as Russia is a member of the BRICS Alliance, which includes Brazil, Russia, India, China, and South Africa. The alliance aims to create a new international financial system that is not dominated by the US and other Western countries. China’s yuan has been a critical component of this vision, and the recent development in Russia is a significant boost to its ambitions.

Significant Development in the Global Financial Landscape

China’s yuan has replaced the US dollar as the most traded currency in Russia. The deepening ties between China and Russia, particularly in the face of Western sanctions, have played a crucial role in this shift. As China continues to promote the use of its currency overseas and the BRICS Alliance aims to create a new international financial system, the yuan’s rise is likely to continue.

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Will the US Dollar Be Dethroned?

As the BRICS nations are working on creating a new currency to reduce US dollar hegemony, while reducing dependence on the US dollar this could help other economies mitigate the impact of economic and political changes in the US. This could pave the way for other countries to follow suit, which could eventually lead to the US dollar losing its status as the official reserve currency of the world.

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Stephen Fruchs

Stephen Fruchs is a finance contributor on the Trade Oracle platform. His experience is extensive in everything from micro to macroeconomic trends. With a decade of experience in the finance space, Stephen Fruchs provides consistent economic insights into the changing stock market landscape.