The internationalization of the yuan has emerged as a focal point in discussions surrounding global trade and finance, yet it is becoming increasingly clear that China’s ambitions in this arena are falling short. Despite a modest rise in the yuan’s presence on the global stage, a multitude of structural barriers and geopolitical dynamics continue to restrict its potential.
Since 2021, the yuan’s share of global trade settlements has risen from a meager 2-3 percent to approximately 4.3 percent. While this growth may seem impressive, it pales in comparison to the dominance of the U.S. dollar, which accounts for a staggering 47 percent of global trade settlements, and the euro, which commands 23 percent. Much of the yuan’s growth can be attributed to China’s intensified trade relations with Russia, particularly as both nations seek to circumvent sanctions that limit their access to U.S. dollar transactions. However, this reliance on yuan settlements is largely confined to transactions with heavily sanctioned countries, raising questions about the currency’s broader viability.
Misleading narratives from Chinese state media have exaggerated the yuan’s standing in global trade, claiming that it has reached a record 24 percent share in international trade settlements. This assertion, however, is rooted in a misunderstanding of the data; it reflects that 24 percent of China’s own international trade is settled in yuan, which translates to less than 5 percent of global trade—significantly lower than what is being claimed. For instance, in 2023, trade between Russia and China soared to approximately $240 billion, with just $68.7 billion settled in yuan, illustrating the yuan’s limited role even in bilateral trade with a country that has few alternatives.
Furthermore, the growing scrutiny from Chinese banks regarding transactions with Russian counterparts, many of whom appear on U.S. sanctions lists, is likely to dampen future yuan usage. This hesitance is already resulting in delays and cancellations of deals, further underscoring the precarious nature of the yuan’s current standing. Such trends indicate that even a modest uptick in yuan adoption may be at risk, making it increasingly improbable for the yuan to challenge the dollar’s supremacy.
The currency reserves held by central banks offer another indication of the yuan’s struggle for acceptance. Currently, the U.S. dollar constitutes 58 percent of all foreign currency reserves, while the yuan lags significantly behind at a mere 2.3 percent. Moreover, the dollar’s dominance in this regard is likely understated due to the way Special Drawing Rights (SDRs) are allocated by the International Monetary Fund (IMF). With the dollar making up over 43 percent of the SDR basket and the yuan just 12 percent, many countries inadvertently increase their exposure to the dollar when holding SDRs.
In the realm of foreign exchange trading, the statistics tell a similar story. The U.S. dollar features in a staggering 88 percent of all trading pairs, while the yuan accounts for a mere 7 percent. Furthermore, in trade financing, the dollar commands an overwhelming 84 percent share, even as the yuan has managed to increase its presence to 6 percent, largely due to China’s comparatively low interest rates. Traders consistently demonstrate a preference for the dollar, willing to endure higher costs to maintain its liquidity and stability.
While there have been discussions between China and Saudi Arabia regarding the possibility of trading oil in yuan, significant obstacles remain. Acceptance of the yuan by oil exporters hinges on its convertibility and usability, which are currently inadequate. Moreover, Saudi Arabia’s currency is pegged to the dollar, presenting little incentive for the nation to undermine the dollar’s stability or usability. The potential shift in this relationship could have broader implications, particularly given the long-standing military ties between the U.S. and Saudi Arabia, which are intricately linked to oil pricing.
Looking ahead, despite Chinese Communist Party leader Xi Jinping’s push for greater yuan usage in international trade, the hurdles remain formidable. His recent diplomatic efforts to deepen ties with Saudi Arabia, including the ambitious Vision 2030 initiative, could enhance relations but are unlikely to shift the currency dynamics dramatically in the near term.
In conclusion, while the yuan has seen some incremental gains in global trade, its path to becoming a mainstream international currency is fraught with challenges. The reliance on the dollar for trade and finance persists, fueled by its unparalleled liquidity and the structural advantages that come with being the world’s primary reserve currency. As the geopolitical landscape continues to evolve, China will need to address the fundamental limitations of the yuan if it aims to elevate its status on the global stage.
