Avoiding sanctions against Russia and not wanting to be forced by the US to play by its rules, many countries turn their backs on the USD, can the Chinese NDT be a 'wall'?

Recently, many customers are willing to pay their bills in yuan, due to the economic crisis, Western sanctions against Russia, China's growing position and concerns about the US weaponizing the dollar.

Né lệnh trừng phạt Nga, không muốn bị Mỹ áp luật chơi, nhiều quốc gia quay lưng với USD, đồng NDT Trung Quốc có thể là ‘bức tường thành’?

Countries that want to trade with Russia despite Western sanctions are increasingly looking to China's yuan as an alternative to the dollar. (Source: Reuters)

Lucky Yuan?

Newsan, one of Argentina’s largest home appliance retailers, imports most of its products from China. Until now, it has paid for its refrigerators, TVs and parts in dollars.

But last month, as part of an effort to ease pressure on Argentina's dollar-strapped economy, Newsan switched to settling transactions in Chinese yuan (CNY).

“The yuan is becoming increasingly relevant as a currency for international trade,” said Luis Galli, chief executive of Newsan.

Argentina's economy is in crisis - again. Drought has hit its vital agricultural export sector, pushing an economy already struggling with soaring inflation to the brink of recession.

As Argentina’s supply of dollars dwindles, the government announced in April 2023 that it would pay for $1 billion worth of imports from China in yuan — and for $790 million worth of imports each month thereafter.

The move also triggered a currency swap agreement that will allow companies to borrow yuan from China, Argentina's second-largest trading partner.

The deal is positive news for Beijing, which has long wanted its currency to be used more widely and enjoy some of the power and prestige that the United States enjoys thanks to the greenback's global dominance.

China, however, has had little luck until recently. Suddenly, more customers are willing to pay their bills in yuan, thanks to the country’s economic crisis, Western sanctions against Russia, Beijing’s status as a major lender and growing concerns about being at Washington’s mercy.

In Buenos Aires, importers have embraced the change. “People are rushing to buy in yuan now,” said Rubén Guidoni, a customs broker. “It’s hard to find orders in dollars.”

Importers in Argentina must submit orders, almost by default in dollars, for government approval. But with the current shortage of dollars, getting approval from officials is nearly impossible, leaving some industries virtually at a standstill.

Against this backdrop, orders in yuan are quickly getting the green light. Alejandra Conconi, executive director of the Argentina-China Chamber of Manufacturing, Industry and Commerce, said Argentine companies now use yuan to pay for more than half of the computers, textiles, mobile phones and motorcycle parts imported from the Northeast Asian country.

For its part, Newsan still processes orders in NDT every week.

In April 2023, the Brazilian government announced that companies could settle transactions in yuan. In March, a French company accepted yuan payments for 65,000 tons of liquefied natural gas. A few weeks earlier, the Chinese currency became the most traded currency on the Moscow stock exchange.

But there is no sign that the yuan will dethrone the dollar anytime soon, according to economists inside and outside China. To do so, more countries need to pay each other in yuan, even for trade transactions that do not involve China, which seems far-fetched.

The widespread use of the US dollar makes it easy to exchange and difficult to replace, which is a challenge for the acceptance of the yuan, which is more expensive and inconvenient because it is less widely circulated outside China.

But a recent spate of yuan payments has made some progress toward Beijing’s vision of China leading a global economic order insulated from the volatility of the dollar and Western sanctions on Russia.

This has become all the more necessary amid growing tensions between Moscow and Washington, and Beijing is also concerned as the West imposes sanctions on Russian companies.

Argentine Economy Minister Sergio Massa (right) and Chinese Ambassador to Argentina Zou Xiaoli after signing an agreement for Argentina to pay for imports from China in yuan, April 2023. (Source: AFP/Getty)

Can China's currency become a 'great wall'?

So far, these efforts have not translated into a dramatic economic shift. Most of the countries interested in using the yuan are struggling economically (like Argentina), or are looking to trade with Russia despite sanctions (like Brazil). And while the yuan’s share of global trade finance has more than doubled since 2021, it still accounts for less than 5%.

But the slight increase in international circulation of the yuan has also reinforced the idea that China's currency could be a bulwark against not only Western sanctions but also the floating dollar, the turmoil caused by the collapse of several US banks and Washington's impending debt ceiling challenge.

“The dominance of the US dollar makes the world heavily dependent on Washington. It makes the US Federal Reserve the organization that decides the world’s monetary and financial issues,” said Xi Junyang, deputy director of the Center for Modern Finance Research at the Shanghai University of Finance and Economics.

Countries with close trade ties to Russia, such as Brazil, have become more wary of relying on the greenback. In a speech in Shanghai last month, Brazilian President Luiz Inácio Lula da Silva called on the BRICS group of major and emerging economies (Brazil, Russia, India, China and South Africa) to abandon the dollar.

The idea has gained further momentum since the West imposed an unprecedented series of sanctions on Russian entities and individuals, weaponizing the dollar.

“There is clearly a lot of interest, not just from China and Russia, but from many other countries, in finding alternatives to the dollar payment system because everyone has seen the ways the US can weaponize the greenback,” said Arthur Kroeber, head of research at Gavekal Dragonomics, a Chinese economic consultancy.

Beijing has exploited the vacuum created by Western sanctions against Moscow. According to Chinese customs data, its trade with Russia increased by 153% in April 2023 compared to the same period last year.

Other countries that want to trade with Russia despite sanctions are increasingly looking to the yuan as an alternative to the dollar.

Last month, Bangladesh announced it would pay $318 million to a Russian nuclear power developer in yuan and transfer the money via an international payments network that Beijing has developed as an alternative to Western payment networks.

The payment has yet to be made and there have been reports that the US - Bangladesh's largest trading partner - has imposed further sanctions on the companies involved, warning Dhaka not to proceed with the announced move.

But Beijing could use trade arrangements to gradually promote global use of the yuan. Analysts say the goal is not to completely break away from the dollar system but to foster the perception that China’s currency is as stable and useful as the Japanese yen or the euro.

“As China’s trade and investment expands overseas, we should have a level playing field,” Yi Gang, governor of the People’s Bank of China, said last month in a speech at the Peterson Institute for International Economics. “We respect the choices of businesses and individuals. It’s great if they use the yuan, and it’s also great if they prefer the dollar, the euro, or the yen… We want fair competition.”

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