The sheer size of the Chinese economy, as well as its rapid growth, is impressive. China has managed to maintain one of the highest economic growth rates in the planet, and has managed to lift over 800 million people out of poverty in just a few decades. As Kavan Choksi further underlines, China is among the largest exporters in the world, and among the most valuable trading partners of Brazil, Germany, Japan, and many other nations. It has the second-largest economy in the world based on the market exchange, and has long wanted to make the yuan a global force. The country has in fact put in significant efforts to do so in recent years.
Kavan Choksi talks about the growing influence of China’s Yuan
For decades, the United States has reigned supreme as the dominant global currency. However, many concerns have come up over the years in regard to how this benefits the U.S. and potentially hurts emerging markets. The value of the dollar has majorly appreciated against most other currencies in 2022, as Federal Reserve hiked interest rates. This however leads to negative consequences for residents of almost any nation that pays for imports in dollars, borrows in dollars, as well as purchases wheat, oil, or other commodities priced in dollars. After all, these transactions have become more expensive.
Subsequent to the invasion of Ukraine by Russia in early 2022, the United States and its Western allies put sanctions on Russia. These sanctions include cutting down the access of Russia to the global dollar-based payments system known as SWIFT (Society for Worldwide Interbank Financial Telecommunication). This clearly displays how the dollar can be weaponized. As Russia got majorly cut off from international financial markets, it went ahead and stepped up its trade with China. Russia started to receive payments for coal and gas in yuan, and Moscow particularly increased the yuan holdings in its foreign currency reserves. Certain Russian companies also issued bonds denominated in yuan.
As per Kavan Choksi, other nations took notice of the increasing use of yuan in Russia, and saw a chance to reduce their own dependency on the dollar. Now Bangladesh is paying Russia in yuan for the construction of a nuclear power station. On the other hand, France is accepting payment in yuan for liquefied natural gas purchased from a state-owned oil company in China. A Brazilian bank controlled by a Chinese state bank additionally has become the first Latin American bank to participate directly in China’s payments system, CIPS. Even Iraq today wants to pay for imports from China in yuan. While the combined dollar amount of these transactions is still relatively small, the shift to yuan is considerable.
The Chinese government launched the Cross-Border Interbank Payments System, or CIPS, in the year of 2015 to facilitate cross-border payments in yuan. In 2018, it launched the first yuan-denominated crude oil futures contracts to allow exporters to sell oil in yuan. Today China is also emerging as one of the largest creditors in the world, with the government and state-controlled enterprises extending loans to dozens of developing countries.