Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Yuan Lending Is Reshaping Emerging Market Trade Finance
Transcript
- Lucas: So there's this quiet shift happening in trade finance that I think most people are missing, and it's got nothing to do with tariffs or supply chains in the usual sense. I'm talking about the yuan. Luna: China's currency, specifically its use in trade settlements. I've seen the headlines — 'yuan surpasses euro as second-most-used trade currency' — but what does that actually mean on the ground? Lucas: Right, and the numbers are worth sitting with. In 2025, yuan-denominated trade settlements accounted for 30 percent of China's total cross-border transactions, up from 18 percent in 2020. That's not just a rounding error — that's a structural shift. Luna: And it's not just China pushing it. We're seeing actual demand from emerging markets. Brazil, Argentina, Saudi Arabia, even Pakistan — they're all doing deals in yuan now. Lucas: Exactly. Take Brazil — in early 2025, they settled a major soybean export deal directly in yuan, bypassing the dollar entirely. That would have been unthinkable five years ago. And it's not just agricultural commodities. Saudi Arabia issued a yuan-denominated bond in 2024 — worth about 10 billion renminbi, or roughly 1.4 billion dollars. Luna: Which is fascinating because the petrodollar system has been the bedrock of global trade for decades. If Saudi Arabia starts pricing oil in yuan — even partially — that's a huge deal. Lucas: And they haven't done that yet, not officially. But the bond issuance signals they're comfortable holding yuan-denominated debt. And look at the BRICS bloc — they've been talking about a common currency, but what's really happening is bilateral trade in local currencies, especially yuan. Luna: So it's less about replacing the dollar and more about creating alternatives. Diversification of settlement currencies. Lucas: Precisely. And for emerging markets, that's a big deal because they often face dollar shortages when the Fed tightens. If they can settle trade in yuan, they reduce their dependency on dollars. That's exactly what happened with Pakistan last year — they imported Russian oil using yuan because they couldn't get enough dollars. Luna: And that brings us to the investment angle. If more trade is settled in yuan, then EM companies and sovereigns will need to hold more yuan reserves. That shifts demand for yuan-denominated bonds. Lucas: You're seeing it already. China's central bank has swap lines with over 40 countries now, mostly in emerging markets. Those swaps let countries borrow yuan to pay for Chinese goods, bypassing the dollar. And as those swaps get used, the yuan's share of global payments has doubled to nearly 4 percent on SWIFT. Luna: It's still small compared to the dollar's 47 percent, but the trajectory is what matters. And for EM investors, this creates a new layer of currency risk and opportunity. Lucas: Absolutely. If you're holding EM bonds denominated in dollars, you're exposed to the Fed and the dollar index. But if more issuance shifts to yuan, you need to think about China's monetary policy and the yuan's stability. The yuan has been relatively stable against the dollar this year — around 6.79 per dollar — but that's a managed float, not free. Luna: Speaking of which, the trade-weighted dollar index is still strong at 120.7, but it's actually dipped a bit from 121.15. So there's some pressure on the dollar, and that might be accelerating the search for alternatives. Lucas: Yeah, the dollar is still king, but the cracks are there. And the interesting thing is that China is not trying to dethrone the dollar overnight — they're just making the yuan a viable option for trade finance. It's a long game. Luna: So for our listeners who follow EM equities or fixed income, what's the practical takeaway? Should they be looking at yuan-denominated bonds? Lucas: I think the first step is awareness. If you're investing in EM ETFs — say, the iShares MSCI Emerging Markets ETF, ticker e e m, which is down about 1 percent in the last five days — you're exposed to currencies. The divergence between countries that align with China and those that don't is going to widen. Luna: Right, because countries that sign swap lines with China and settle trade in yuan might see less currency volatility versus the dollar. But they also tie themselves to China's economic cycle. Lucas: And that's the trade-off. But look at the data: over the past five days, the iShares China Large-Cap ETF, F-X-I, is up 3 percent, while the iShares MSCI Brazil ETF, e w z, is up almost 3 percent too. That's partly because China's stimulus hopes are lifting EM broadly, but also because commodity exporters like Brazil are benefiting from yuan settlement deals. Luna: So there's a real connection between trade finance shifts and asset prices. It's not just a macro curiosity. Lucas: Exactly. And that's why I find this so interesting — it's a structural change that plays out in bond yields, currency forwards, and even equity sector performance. If you're a trader, you want to watch the offshore yuan market and the swap line announcements. Luna: Before we go deeper into that, can I just say — if this kind of economic analysis is useful to you, the way we keep the show ad-free is through listener support. You can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. We don't do sponsor reads, we don't run ad breaks — it's just us and the data, thanks to listeners who chip in. Luna: So if you've gotten something out of today, consider it. And now back to the yuan. Lucas: Right. So one specific thing to watch is the upcoming BRICS summit this year. There's been talk of a BRICS clearing house for trade settlements, potentially using a blockchain-based system. If that happens, it could accelerate yuan adoption even further. Luna: Because it would provide an alternative to SWIFT. Russia has already been pushing that after being cut off from SWIFT in 2022. And China has its own cross-border payment system, CIPS, which is growing fast. Lucas: CIPS processed about 1.4 trillion dollars in 2025, up 80 percent from 2020. Still tiny compared to SWIFT's 15 trillion, but the growth rate is what matters. And it's mainly used for trade finance, not speculative flows. Luna: So we're seeing a parallel infrastructure emerge. And that has implications for how EM central banks manage reserves. I read that at least 12 central banks have increased their yuan holdings over the past two years. Lucas: Yeah, the IMF's data shows the yuan's share of global foreign exchange reserves is now about 2.9 percent, up from 2.1 percent in 2020. Still small, but it's the fastest-growing reserve currency share. And for EM central banks, diversifying away from the dollar makes sense when the US runs large trade deficits. Luna: Which brings us back to the US current account deficit — it was 226 billion dollars in the first quarter of 2026, wider than the previous quarter. So the structural supply of dollars is increasing, which could eventually weaken the dollar. That makes alternatives more attractive. Lucas: Exactly. And China is happy to provide liquidity through swap lines and yuan bonds. So it's a self-reinforcing cycle: more trade in yuan leads to more yuan reserves, which leads to more yuan-denominated bonds, which leads to more trade in yuan. Luna: But there are risks. The yuan is not fully convertible, and China controls capital flows. So if you hold yuan assets, you're exposed to policy risk. China could devalue the yuan to boost exports, which would hurt EM countries that have borrowed in yuan. Lucas: That's the big caveat. In 2015, China's surprise devaluation sent shockwaves through emerging markets. So while the yuan offers an alternative, it's not a free-market currency. Investors need to hedge that political risk. Luna: So what's the one concrete thing you'd tell a listener to watch this week? Lucas: Keep an eye on the offshore yuan exchange rate, specifically the CNH versus the dollar. If it strengthens past 6.7, that could signal more central bank buying of yuan assets. Also watch for any new swap line announcements — especially from African commodity exporters. Luna: And for EM bond investors, look at the yield differential between yuan-denominated Chinese government bonds and dollar-denominated EM bonds. If that spread narrows, it means the market is pricing in a structural shift. Lucas: Good call. Alright, that's the yuan trade finance story. It's not going to replace the dollar anytime soon, but it's changing the calculus for emerging markets in real time.