The Chinese Yuan Is Unsettling the US Dollar: Here’s Why
For decades, the US dollar has ruled over global marketing narratives. The currency has had a long and extensive history of dominating global markets and perspectives. With the dollar holding the status of reserve currency, its prestige was unparalleled and paramount on a global scale.
But, with calls for de-dollarization expanding, the US dollar now sits in a rather vague situation. With high inflation factors coupled with geopolitical tensions gnawing at it, its positioning has become unstable.
Amidst such chaos, China is leaving no stone unturned to catapult its currency, the Yuan, onto a global stage. Here’s a look at the dollar’s newest competitor, which may have the potential to turn the tables around.
Also Read: BRICS To Take Loans in Chinese Yuan, Ditch US Dollar
Why is The Chinese Yuan Rising?
Dubbed the fifth largest currency in the world, the Yuan is now projecting a strong market stance. Per a GIS report, the Yuan is now the fifth largest international reserve currency.
“Yuan foreign exchange transactions have increased to 7 percent of the global market share, making it the fastest-rising currency in the past three years.“
China has long been trying to diversify Yuan’s use cases behind its national borders. According to Forbes, “the Chinese government launched the Cross-Border Interbank Payments System to facilitate cross-border payments in yuan. Three years later, in 2018, it launched the world’s first yuan-denominated crude oil futures contracts to allow exporters to sell oil in yuan.” the article shared.
To bolster the Yuan up a notch, China emerged as the world’s top creditor, giving loans to other developing countries.
Also Read: BRICS: China Injects Record 1.4 Trillion Yuan Into Money Markets
Amid the Russia-Ukraine war, the sanctions imposed by the US and other allies disabled Russia’s access to SWIFT. This, in turn, displayed the potential for dollars to be weaponized.
It was then that Russia started to interact with the Yuan, with Moscow increasing its Yuan holdings. This event set in motion several changes, including compelling other countries to look at Yuan in a new light.
“Other countries took notice of Russia’s increasing use of the Yuan and saw an opportunity to decrease their dependency on the dollar.” The Fortune article stated.
What Makes a Currency Supreme?
Per a report by GIS, a currency should possess three factors to be acknowledged on a global scale. A valuation function to settle trade based on transaction demand. A payment function to serve as a reserve asset for global central banks. lastly, a currency should act as a storage function to become a dependable asset for private investors, banks, and other institutions.
These factors give the dollar a considerable amount of attention and significance for it to enjoy the perks that come with it. For any currency to establish dominance in the global market, it needs to fulfill these three criteria to fit the mold. For the Yuan to bolster its momentum, it needs to find a value proposition among all sectors to defeat the dollar holistically.
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