Pushed by the West, the Yuan unexpectedly benefits, Mr. Trump threatens countries to abandon the USD

Western sanctions against Russia have pushed trading in China's yuan (CNY) to new highs, but this has left the CNY exposed to the threat of tariffs from former President Donald Trump.

Transactions in renminbi are benefiting from bilateral agreements between Russia and China. (Source: CNBC)

When the West imposed sanctions on Russia over its military campaign in Ukraine in February 2022, it inadvertently affected trading in dollars, euros and other currencies.

Russian banks were blocked from the SWIFT international payment system and the central bank's foreign currency reserves were frozen, forcing Moscow to convert its remaining reserves into non-Western currencies, including the yuan.

Recently, the British business newspaper Financial Times (FT) cited data from China's State Administration of Foreign Exchange (SAFE) reporting that the Kremlin's energy deals with the world's second largest economy have helped international transactions in yuan reach a record high.

NDT benefits

The number of bilateral transactions using the Chinese currency increased by a third in July 2024, to 53% from 40% in July 2021.

According to the FT , in 2010, 80% of China's overseas trade was conducted in USD, but that figure has halved since Western sanctions against Russia came into effect in 2022.

"Trading in yuan is convenient for both Russia and China. Moscow doesn't have many other currency options, while Beijing benefits because it is making progress in internationalizing the yuan," said Maia Nikoladze, deputy director of the Atlantic Council's Geoeconomic Center.

Transactions in yuan are benefiting from bilateral agreements between Moscow and Beijing. Russia has also increased its holdings of the Chinese currency in its foreign exchange reserves. In addition, Moscow financial institutions have started issuing yuan-denominated bonds.

Other countries - especially those in the BRICS group of leading emerging economies - are also increasingly interested in the Chinese currency.

Leaders of BRICS countries have floated the idea of ​​a common currency to create a multipolar financial system less dependent on the US dollar.

Many countries in the Southern Hemisphere have expressed concern about the West's move to freeze Russia's reserves, said Hanns Gunther Hilpert, senior research fellow at the German Institute for International and Security Affairs (SWP).

"They may have problems with the US in the future and their reserves may also be frozen. So these countries are gradually moving away from the US dollar," he said.

Republican presidential candidate Donald Trump sees de-dollarization as such a major threat to the country's power that at a recent campaign rally he threatened to impose a 100% tariff on countries that refuse to use the currency if he becomes President.

"Many countries are abandoning the dollar. If you abandon the dollar, you will not be able to do business with the United States because we will impose a 100% tariff on your goods," Mr. Trump declared.

The Chinese Yuan has yet to make waves in the international currency basket. (Photo: Wang Jianfeng)

Countries "following" Russia

Beijing has signed agreements with several other countries to conduct transactions in yuan.

Saudi Arabia - one of the largest oil exporters to China - signed a three-year currency swap deal with Beijing in November 2023. The deal is worth the equivalent of $6.93 billion (€6.26 billion).

The deal marks a significant shift in the global energy market, which was previously dominated by the US dollar.

While a full switch to yuan pricing for all Saudi Arabian oil sales is unlikely in the short term, the agreement allows both countries to begin testing without disrupting existing trade operations.

Other countries such as Brazil, Iran, Pakistan, Nigeria, Argentina and Türkiye have agreed to conduct more transactions in yuan.

In Iran's case - heavy Western sanctions have forced Tehran further into the sphere of influence of the world's second-largest economy.

Tanker-tracking data from trade analytics firm Kpler shows that Chinese refiners bought 90 percent of Iran’s oil exports last year. Tehran, in turn, received payments in yuan for its oil via Beijing’s small banks.

Meanwhile, in Argentina, a country facing a devastating economic crisis and suffering from a severe shortage of USD to pay for imports, repay debts and stabilize the peso, by paying for yuan, the Latin American country has somewhat eased the pressure on its international reserves.

NDT cannot "make waves" yet

Despite Beijing's moves to internationalize the currency, the yuan has yet to make waves in the international currency basket - something experts say is crucial to becoming a reserve currency.

Becoming a reserve currency may "come with a price", Mr Hilpert said, in the form of political and economic instability.

As for the yuan, he said, the currency could face a wave of speculation - something the Chinese fear.

Looking back at what happened to Thailand and South Korea, Mr. Hilpert said, at the height of the Asian financial crisis in 1997, the baht and won lost more than half their value against the dollar. At that time, the two countries were forced to seek bailouts from the International Monetary Fund (IMF).

Mr. Nikoladze noted that the world's second-largest economy maintains capital controls that limit the free flow of capital into and out of the country, which will be an important factor in helping the yuan fulfill its potential as a currency in global trade.

In January 2024, Chinese President Xi Jinping reaffirmed his ambition to make China a financial powerhouse and said the country's financial system is different from Western models.

However, Asia's largest economy is currently facing many challenges such as high corporate, household and local government debt, a worsening real estate crisis and a struggling property market.

Accordingly, experts assess that, up to now, the USD is still the world's largest reserve currency.

Source: https://baoquocte.vn/duoc-phuong-tay-day-thuyen-nhan-dan-te-huong-loi-bat-ngo-ong-trump-de-a-cac-nuoc-tu-bo-usd-286095.html