BYE, BYE GREENBACK! IN GAME WELL-PLAYED BY CHINA, DE-DOLLARIZATION KICKS INTO HIGH GEAR – YUAN HITS RECORD HIGH, OVERTAKING YEN AS 4TH MOST USED CURRENCY

 

Written by Finance Twitter

As recently as May 2023, the Western news media were still laughing at the idea of de-dollarization. They said China’s Yuan faced great obstacles to becoming a global reserve currency. They ridiculed the Chinese currency because nobody wants to buy Chinese bonds. They mocked that foreign investors have been dumping Chinese bonds since Russia invaded Ukraine.

If foreign investors were not interested in Chinese bonds, it means there was no demand for Chinese Yuan, which in turn means de-dollarization simply won’t happen. They played down the Yuan’s share of world FX reserves, which took 7 years to double to only 2.69%. After all, the amount of global reserves held in Yuan / Renminbi was merely US$298 billion at the end of last year.

To put Yuan in perspective, in the US$12 trillion global reserves, nearly 80% is denominated in dollars and Euros. Therefore, the Chinese currency was insignificant. It would be a long way to go for the Renminbi to reach even the levels of British sterling or the Japanese yen, economists and analysts from the West argued. In short, the Renminbi was a useless pariah currency.

The biggest factor was the pressure from the U.S. on the Group of Seven (G7) allies not to invest in China. However, what the economists and analysts refused to admit was the fact that the U.S. dollar share of FX reserves fell to a 20-year low of 58% in March 2022 – thanks largely to the freezing of Russia’s US$640 billion in gold and FX reserves following its 2022 invasion of Ukraine.

Six months later in November (last month), however, the Chinese Yuan’s share of global payments hit a record high and became the fourth most used currency. According to SWIFT Financial System, the currency was used in 4.61% of transactions, climbing from 3.60% in October. In fact, the Renminbi overtook the Japanese Yen’s market share, which slipped to 3.41% from 3.91%.

More importantly, other world’s top currencies also lost their market share during November alone. The U.S dollar lost market share, dropping to 47.08% from 47.25%, while the Euro fell to 22.95% from 23.36%, and the British pound tumbled to 7.15% from 7.33%. From another angle, the Renminbi global share has nearly doubled in just a year – from November 2022’s 2.37% to last month’s 4.61%.

Sure, the greenback still dominates the global transactions, but the currency has been losing ground as the world’s favourite reserve currency. The Yuan, meanwhile, is gaining market share as the currency kicks into high gear after countries such as Saudi Arabia, China, India, Turkey and of course, Russia, started to re-think about blindly trusting the dollars as a safe haven.

Thanks to Biden administration in freezing (now the West is talking about seizing) the Russian foreign reserves, many countries have started to dump the almighty dollar, or quietly shifting to other currencies. India is purchasing Russian oil in UAE dirham and roubles. Even France’s TotalEnergies and Chinese national oil company CNOOC has completed their first Yuan-settled LNG trade in March.

The Chinese-French energy deal involving 65,000 tons of LNG imported from the United Arab Emirates (UAE) marked a major step in Beijing’s attempts to challenge the “petrodollar” with the alternative “petroyuan”, something which China introduced in 2018 to give the U.S. dollar a bloody nose. China itself switched to the Yuan to buy some US$88 billion worth of Russian oil, coal and metals.

Essentially, China and Russia have almost fully phased out the dollar from their bilateral trade, where over 90% of trade between the two nations is done with either the Yuan or the Rouble. China-Russia trade hit a staggering US$218.2 billion during January-November period this year. In November alone, bilateral trade value surged to US$21.5 billion – the highest since the Ukraine war began in Feb 2022.

Let’s put it in another perspective. Rather than laughing at China’s currency global share growth from 2.37% to 4.61% in 12 months, it’s worth to note that in the late 1970s, the US dollar’s share of global reserve currencies stood at a mighty 85% – only to have fallen to 47.08% last month. Even if the world central banks do not load the Yuan, they bought something else.

The latest data from the World Gold Council (WGC) showed that the central banks increased their gold purchases to 337-tonnes over the third quarter of the year, led by China (increased by 78 tonnes), Poland (57 tonnes), Turkey (39 tonnes) and India (9 tonnes). Cumulatively, purchases by world central banks reached 800-tonnes over the first three quarters of the year – a record amount.

Like it or not, de-dollarization is no myth. While the dollar remains difficult to replace, especially in trade, it does not mean the greenback won’t lose its market share. Today, the world trade begins to be driven by bilateral trade between emerging countries. Five major emerging economies – BRICS – comprises Brazil, Russia, India, China and South Africa have shown they do not need dollar to trade.

And China is leading the way to break away from the U.S. currency. The world’s second largest economy is presenting its currency as an alternative to the dollar, especially for oil and gas imports. The conflict in Ukraine and the geopolitical vulnerability caused by dollar-dependency provided justification to the world why they should shift to another currency such as the Yuan.

In addition, China’s stockpile of U.S. government debt hit the lowest level in 14 years. The balance of U.S. Treasurys held by Beijing totalled US$805.4 billion in August – down 40% from a decade earlier. Clearly, it was a strategy to prop up the Yuan while at the same time reduce its holdings as part of de-dollarization. But China was not alone in dumping the dollar.

Japan too was dumping the dollar as it tried to prop up the Yen, which has been on a downward trend since early 2022. De-dollarization also accelerates between Saudi Arabia and China when they decouple their trade from the dollar. China is Saudi’s largest trading partner, dominating both exports and imports. In September, the kingdom’s exports to China increase by 34% compared to August.

Last month, Saudi and China signed a US$7 billion currency swap agreement to strengthen their financial co-operation and boost the use of local currencies, while also promoting trade and investments. The value might not be huge, but it symbolises the beginning of a strategy to reduce their reliance on the Western financial system – very bad news for the petrodollar.

More importantly, besides Saudi, two other Gulf state – Egypt and the UAE – were also invited to join BRICS – China’s tactical move to grow its influence in the Middle East. With Saudi leaning more towards China, the U.S. is getting nervous over the prospect of China pulling Saudi and its powerful allies into the Chinese orbit.

Written by Finance Twitter

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