Bye-Bye Dollar: China Dumps USD Trade by Over 48%

China’s accelerating de-dollarization reflects a strategic shift towards economic sovereignty and reduced reliance on the USD.

China is accelerating its move away from the US dollar (USD) in international trade and finance.

This shift raises questions about the future of the USD as the world’s primary reserve currency.

The Rise of the Renminbi (Yuan) in Cross-Border Payments

Since 2010, China has significantly increased the use of its currency, the renminbi (RMB), in cross-border transactions.

In early 2010, the RMB accounted for less than 1% of China’s cross-border payments, while the USD dominated with approximately 83%. However, by March 2023, the RMB had surpassed the USD in China’s international settlements, marking a historic shift.

As of March 2024, over 52% of Chinese payments were settled in RMB, while the USD accounted for 42.8%.

This dramatic increase highlights the growing global acceptance of the RMB, driven by foreign investors’ willingness to trade assets denominated in China’s currency. Furthermore, countries like Brazil and Argentina have started allowing trade settlements in RMB, enhancing its international presence.

Factors Driving China’s De-Dollarization

Several factors contribute to China’s de-dollarization. Key among them is the strategic aim to reduce reliance on the USD, which is influenced by geopolitical tensions and economic considerations.

The increasing use of RMB in international trade and finance is part of China’s broader strategy to strengthen its economic sovereignty and reduce exposure to US financial sanctions.

Additionally, China’s Belt and Road Initiative (BRI) promotes the use of the RMB in participating countries. By facilitating infrastructure projects and trade in RMB, China fosters economic ties and reduces these countries’ dependence on the USD. Moreover, the expansion of RMB-denominated financial instruments has attracted international investors, further boosting its use.

The Impact on the US Dollar’s Dominance

Despite the rise of the RMB, the USD remains the dominant global currency. It accounts for nearly 60% of global foreign exchange reserves and 89% of global trade finance.

However, the gradual shift towards the RMB indicates a slow erosion of the USD’s unchallenged supremacy.

The impact of this de-dollarization trend is complex. A diminished role for the USD in global finance could lead to underperformance of US financial assets and weaken the effectiveness of US sanctions.

Nonetheless, significant barriers remain to a complete de-dollarization. China’s strict capital controls and slower economic growth limit the RMB’s global liquidity and attractiveness compared to the USD.

Future Projections for Global Currency Reserves

While the USD is likely to retain its leading role in the near- to medium-term, the increasing use of the RMB points to a more multipolar currency system (the coming BRICS currency and financial system).

The diversification of global foreign exchange reserves, with growing shares for non-traditional currencies like the Australian and Canadian dollars, reflects this trend.

The trajectory of RMB’s growth will depend on China’s economic policies, geopolitical developments, and the global economic environment.

If China continues to liberalize its financial markets and promote the RMB’s international use, its share in global reserves could rise further, challenging the USD’s dominance.

The Bottom Line

China’s accelerating de-dollarization reflects a strategic shift to enhance its economic sovereignty and reduce reliance on the USD.

While the USD remains dominant, the rise of the RMB signifies a gradual move towards a more diversified global currency system. The future of global finance will likely see a continued balance of power between the USD and emerging currencies like the RMB and the BRICS common trade currency, driven by geopolitical and economic shifts.