Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How the Chinese Yuan Is Quietly Challenging the Dollar in Emerging Markets
Transcript
- Lucas: So the yuan weakened slightly this week — we're at 6.77 per dollar as of Friday. And if you just glance at that number, it looks like business as usual. The dollar still wins. But here's what's interesting: underneath that headline, the yuan is quietly becoming the settlement currency of choice in a growing number of emerging markets. Luna: Quietly being the key word. It's not like China is making a big show of it, but the data is pretty striking. Lucas: Exactly. So, according to the latest numbers from China's State Administration of Foreign Exchange, over 20 percent of China's cross-border trade is now settled in yuan. That's up from around 2 percent a decade ago. And it's not just China's trade — it's bilateral trade between other countries that are choosing yuan over dollars. Luna: Right. And we're seeing this most clearly in countries that are under US sanctions or want to reduce their exposure to the dollar. Russia is the obvious one, but also Brazil, Saudi Arabia, even Argentina. Lucas: Yeah, Brazil and China signed a deal last year to settle trade in their own currencies, and that's actually started to move the needle. In the first quarter of 2026, yuan-denominated trade between Brazil and China hit a record high. It's still a small slice of the overall pie — maybe 5 percent of Brazil's total trade — but the trajectory is unmistakable. Luna: And then there's the petroyuan angle. Saudi Arabia has been talking about pricing oil in yuan for years, but it's actually happening in small but real ways now. China is Saudi Arabia's biggest oil customer, so they have some leverage. Lucas: That's the piece that gets the most attention, and for good reason. If even a fraction of global oil trade starts settling in yuan, it fundamentally changes the demand picture for the dollar. The dollar is the world's reserve currency largely because everything is priced in it — oil, commodities, debt. If that starts to fray, the implications are huge. Luna: But let's not overstate it. The dollar is still king. It's about 58 percent of global foreign exchange reserves, and the yuan is around 2.5 percent. So we're talking about a very long game. Lucas: Absolutely. This is not a sudden collapse. It's a gradual shift, and it's driven by very practical, boring things — like China offering cheap swap lines to countries that are short on dollars. In March, China extended a 3 billion yuan swap line to Argentina, which is desperately short of foreign currency. That's not a geopolitical statement; it's a lifeline. And it happens to also promote yuan usage. Luna: So from an investor perspective, what does this mean for emerging market portfolios? Should we be thinking about currency exposure differently? Lucas: I think the immediate takeaway is less about betting on the yuan and more about understanding the risks to dollar-denominated assets in certain markets. If you're invested in a country that is actively shifting toward yuan settlement — like Russia or even Brazil — your currency risk changes. The dollar might not be the safe haven it once was in those markets. Luna: That's a good point. And it ties into something we've talked about before: the divergence within emerging markets. This is another axis of divergence. Some countries are doubling down on dollar reliance, others are hedging. Lucas: Right. And the ones hedging tend to be the ones with closer trade ties to China. So, you know, the ASEAN economies, parts of Africa, the Middle East. That doesn't mean they're abandoning the dollar. But they're building a parallel system. Luna: A parallel system that's still tiny, but growing. And it's worth watching because it could change how we think about currency risk in EM. Lucas: Exactly. And speaking of things worth watching — and this is a bit of a tangent, but it's related — we've been able to keep this podcast ad-free and independent because of listeners like you. If you've found our breakdowns useful, and if parsing the nuances of yuan settlement and swap lines is your kind of thing, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to help us keep doing the deep dives without any sponsor noise. Luna: Yeah, and it genuinely makes a difference. Every little bit helps us keep the lights on and the research deep. Lucas: So, back to the parallel system. One concrete example I want to drill into is the BRICS push for a common currency. That's been in the headlines, but it's really more of a symbolic gesture than a practical plan. The real action is in these bilateral swaps. Luna: Right. A BRICS currency would require a level of coordination that just isn't there. But bilateral swaps? Those are happening right now, quietly, deal by deal. Lucas: And the scale is actually meaningful. According to the People's Bank of China, as of the end of 2025, China has active swap lines with over 30 countries, totaling about 4 trillion yuan — that's over 550 billion dollars. Most of those swaps are never drawn on, but they exist as a backstop. And when a country like Argentina actually taps that line, it creates demand for yuan in the spot market. Luna: So it's like a slow drip of yuan adoption through the financial plumbing. Not a dramatic shift, but the pipes are being laid. Lucas: Exactly. And the Chinese are also pushing for yuan-denominated commodities futures. The Shanghai International Energy Exchange already has yuan-denominated crude oil futures, and trading volumes have been growing. It's still a fraction of the Brent or WTI markets, but it's there. Luna: So for the EM investor, the question becomes: does this affect your asset allocation? I'd argue yes, but in a nuanced way. If you're overweight in countries that are deepening yuan ties, you might want to hedge currency risk differently. Lucas: Yeah, and I'd add that it's not just about hedging. It's about recognizing that the dollar's gravitational pull is weakening, even if slowly. That has implications for everything from debt sustainability to inflation dynamics in EM. Luna: One thing we haven't mentioned is the role of the digital yuan. China's central bank digital currency — the e cny — could accelerate cross-border settlement if it's integrated into the swap network. Lucas: That's a huge wildcard. The e cny is already being tested in cross-border pilot programs with Hong Kong, Thailand, and the UAE. If that scales, it could make yuan settlement much more efficient and transparent, which would reduce transaction costs and make it more attractive for trade. Luna: So the digital yuan is essentially the infrastructure play. The swaps are the relationship-building. Together, they're slowly chipping away at the dollar's monopoly. Lucas: Right. And I think the key for our listeners is to not get caught up in the hype — this is a decades-long process. But also not to ignore it, because it's already moving capital flows and risk premiums in subtle ways. Luna: So to sum up: the yuan is gaining ground in EM trade settlement, driven by swap lines and geopolitical shifts, but it's still a fraction of dollar volume. The trend is real, but patience is required. Lucas: And that's the kind of nuanced picture we try to bring you every week. Thanks for listening, and we'll see you next time.