Ukraine War Gives China's Yuan A Needed Boost

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Rankings can be misleading, though. The yuan's average trading volume is still less than a 10th of thedollar's. Moreover, almost all trading was against thedollar, with little trading against other currencies.

And when it comes to global payments, the actual share of the yuan is a mere 2.3% , compared with 42.7% for the dollar and 31.7% for the euro. The yuan also constituted less than 3% of the world foreign exchange reserves at the end of 2022, compared with 58% for the dollar and 20% for the euro.

Thedollar has reigned supreme as the dominant global currency for decades – and concern about how that benefits theand potentially hurts emerging markets is not new .

The value of thedollar appreciated significantly against most other currencies in 2022 as the Federal Reserve hiked interest rates. This had negative consequences for residents of almost any country that borrows in dollars, pays for imports in dollars, or buys wheat, oil or other commodities priced in dollars, as these transactions became more expensive.

After Russia invaded Ukraine in early 2022, theand its Western allies put sanctions on Russia, including cutting Russia's access to the global dollar-based payments system known as the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. That clearly displayed how the dollar can be weaponized.

With Russia largely cut off from international financial markets, it stepped up its trade with China. Russia began receiving payments for coal and gas in yuan , and Moscow increased the yuan holdings in its foreign currency reserves. Russian companies like Rosneft issued bonds denominated in yuan . According to Bloomberg, the yuan is now the most-traded currency in Russia .

Other countries took notice of Russia's increasing use of the yuan and saw an opportunity to decrease their own dependency on the dollar.

Bangladesh is now paying Russia in yuan for the construction of a nuclear power station. France is accepting payment in yuan for liquefied natural gas bought from China's state-owned oil company.

A Brazilian bank controlled by a Chinese state bank is becoming the first Latin American bank to participate directly in China's payments system, CIPS . Iraq wants to pay for imports from China in yuan , and even Tesco, the British retailer, wants to pay for its Chinese imported goods in yuan .

The combined dollar amount of these transactions is still relatively small, but the shift to yuan is significant.

China keeps a tight grip on money coming in and out of the country. Such capital controls and limited transparency in Chinese financial markets mean China still lacks the deep and free financial markets that are required to make the yuan a major global currency.

For the yuan to achieve a truly global standing, it needs to be freely available for cross-border investment and not just serve as a payment medium to accommodate trade.

But the war in Ukraine may have just made it feasible for the yuan to eventually join the ranks of the dollar and the euro – even if the volume isn't there yet.

And anypolicy decisions that weaken the reputation and strength ofinstitutions – such as the recent drama over raising the debt ceiling , which brought the government to the brink of default – will accelerate the rise of the yuan and decline of the dollar.

Tuugi Chuluun is an associate professor of finance at Loyola University Maryland .

This article is republished from The Conversation under a Creative Commons license. Read the original article .