Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Is Using Yuan Trade Settlements to Bypass Dollar Dominance
Transcript
- Lucas: China's central bank just reported that the yuan's share of global trade settlements hit a new record in June — nearly 28 percent of China's cross-border transactions are now done in yuan. That's up from about 20 percent two years ago. Luna: Twenty-eight percent — that's significant. But is that real usage or just Beijing reporting its own swap lines with central banks? Lucas: It's a mix. The People's Bank of China has signed bilateral swap agreements with over 40 countries now. But the real shift is in commodity trade. Saudi Arabia started accepting yuan for oil shipments last year, and that alone moves the needle. Luna: Right, the petrodollar — that's been the bedrock of dollar dominance since the 1970s. If even a fraction of oil trade moves to yuan, it changes the game. Lucas: Exactly. China imports roughly 10 million barrels of crude a day — more than the US. If Chinese refiners pay in yuan, suddenly there's a much bigger pool of yuan circulating globally. And Saudi Aramco has already issued yuan-denominated bonds. Luna: So Beijing's strategy isn't just about trade — it's about creating a parallel financial infrastructure. The digital yuan plays a role there too, right? Lucas: It does. The digital yuan, or e cny, is being tested in cross-border pilot programs with Hong Kong, Thailand, and the UAE. The idea is to bypass the SWIFT system entirely for certain transactions. That's particularly attractive to countries under US sanctions — like Russia and Iran. Luna: Russia's been buying Chinese goods in yuan since the Ukraine war started. I saw data that yuan-denominated trade between China and Russia grew 80 percent year over year in the first quarter. Lucas: That's right. And it's not just Russia. Iran, Venezuela, even some ASEAN countries are increasing yuan settlements. The cumulative effect is that the yuan now accounts for about 4.5 percent of global payments by value — up from under 2 percent in 2020. Luna: Still a long way from the dollar's 40-plus percent share. But the trend is real. Lucas: No doubt. And the US isn't standing still. The dollar's trade-weighted index is still above 120 — strong. But the yuan's rise is happening at the margins, and those margins matter. Let's look at the numbers: the yuan is trading at 6.78 per dollar as of this week, down slightly from 6.79 last week. That's a very gradual depreciation — Beijing wants stability, not a competitive devaluation. Luna: Stability encourages adoption. If the yuan were volatile, no one would want to hold it for trade settlement. Lucas: Precisely. And that's why you see China using its swap lines to provide yuan liquidity to central banks in Argentina, Pakistan, Sri Lanka — countries that are short on dollars. In exchange, those countries agree to settle trade in yuan and often buy Chinese goods. Luna: It's a clever loop. You lend yuan, they buy your exports, and you reduce reliance on the dollar. But there's a risk: if those countries default on the swap, China is stuck with bad debt. Lucas: That's the counterargument. Critics say Beijing is just exporting its own financial vulnerabilities. Argentina has already drawn down its swap line and struggled to repay. But China sees it as a long-term geopolitical investment — building a constituency of nations that have a stake in yuan stability. Luna: And in the meantime, Chinese exporters benefit. They don't have to convert dollars, they avoid FX risk. That's a competitive advantage. Lucas: Exactly. And that's one reason why Chinese exports have remained so resilient — they hit $3.5 trillion last year. Even as the broader economy slows, the export machine keeps running. Luna: Let's talk about the other side — the US response. The Biden administration has been tightening sanctions, but does that actually accelerate de-dollarization? Lucas: Ironically, yes. Every time the US freezes a central bank's dollar reserves — like it did with Russia's $300 billion — other central banks think twice about holding dollars. The IMF has noted that central banks have been diversifying reserves into gold and yuan at a faster pace since 2022. Luna: So US policy is partly driving the shift. But the dollar is still dominant in invoicing, in forex trading, in bonds. It's hard to see that changing overnight. Lucas: No, it's a decades-long process. But look at the data: China's trade surplus is narrowing — imports are rising faster than exports. That means more yuan flowing out to pay for goods, which increases the supply of yuan abroad. That's actually good for internationalization. Luna: If you're a commodity producer selling to China, accepting yuan makes sense because you can use that yuan to buy Chinese machinery or electronics. It's a virtuous cycle. Lucas: And that's what we're seeing with the Belt and Road countries. Chinese construction companies are paid in yuan, they pay local workers in local currency converted from yuan — the whole ecosystem is slowly shifting. Luna: So where does this leave investors? If you hold Chinese equities or the FXI ETF — up over 3 percent this week — does yuan internationalization matter? Lucas: It matters because a more widely used yuan means Chinese companies face less currency risk, lower transaction costs, and potentially higher valuations. But it also means more scrutiny from the US Treasury. We saw that when China was added to the currency manipulator list briefly in 2019. Luna: Speaking of ETFs, the KWEB — China internet stocks — is up over 4 percent this week. That's partly driven by trade deal hopes, but also by the narrative that China is becoming a more self-sufficient financial system. Lucas: Right. And that self-sufficiency is exactly what Beijing wants. But there's a tension: to be a true reserve currency, China needs to allow free capital flows. It doesn't. So the yuan will remain a niche currency for trade settlement, not a full alternative to the dollar, for the foreseeable future. Luna: Unless they open up the capital account. But that would mean letting money leave China freely — which could trigger capital flight given the property crisis. Lucas: Exactly. So Beijing is walking a tightrope. It wants yuan adoption but not at the cost of financial instability. That's why the digital yuan is so interesting — it gives them control. They can track every transaction. Luna: Speaking of the show — if walking through these economic shifts with us has made something click, we keep this podcast ad-free deliberately. No commercials, no sponsors. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Lucas: Yeah, that's the only reason we can dive into topics like this without worrying about pleasing advertisers. Appreciate anyone who chips in. Luna: Alright, back to the yuan. One more angle: the IMF's Special Drawing Rights basket. The yuan is already in it, with a 12.28 percent weight. But that hasn't translated into much reserve holding outside China. Lucas: That's true. Central banks hold about 2.5 percent of their reserves in yuan — up from zero a decade ago, but still tiny compared to the dollar's 58 percent. The SDR inclusion was symbolic, but without convertibility, it's limited. Luna: So the question is: what would it take for the yuan to become a truly global currency? Full capital account liberalization, rule of law reforms, and a deeper bond market. Lucas: And that's a multi-decade project. In the meantime, China is focusing on what it can control: bilateral trade, commodity deals, and digital infrastructure. The cumulative effect may be slow, but it's real. Luna: I think the key takeaway for our listeners is that de-dollarization is not a binary event — it's a gradual process that's already happening at the margins. And those margins could become the mainstream over time. Lucas: Exactly. And investors should watch the yuan's share in global payments, the number of swap lines, and the volume of yuan-denominated oil contracts. Those are the leading indicators. Luna: Great angle. Thanks, Lucas. Lucas: Thanks, Luna. That's our show for today.