Report discredits the belief in China's yuan supplanting the U.S. dollar
The use of China's yuan for trade has seen a significant increase, marking a notable, though gradual, acceleration in the process of dedollarisation in global finance. However, this shift is not solely driven by the yuan, but is part of a broader, complex trend towards financial decentralisation.
According to a recent report published by our platform, the yuan's internationalisation index increased by about 11% in 2024, placing it ahead of currencies like the Japanese yen and British pound, but still far behind the US dollar, which remains dominant despite a slight decline. This shows that while the yuan's rise is significant, it is incremental.
China promotes yuan internationalisation as a strategy to reduce vulnerability to geoeconomic shocks and to push for reform of the global monetary system. However, the yuan remains tightly managed against the US dollar, with China's central bank and state banks actively intervening to control the currency’s exchange rate movements. This managed regime limits the yuan’s full market-driven potential, indicating cautious steps rather than rapid dedollarisation.
Broader dynamics include US dollar depreciation due to geopolitical and economic policy uncertainties, and the relative weaknesses of other major currencies like the euro, pound, and yen. The yuan’s rise occurs in this broader context where no currency fully displaces the dollar yet.
Financial decentralisation also involves emerging challenges from US-backed stablecoins and digital currency innovations. These innovations threaten traditional roles of both the dollar and other currencies, pointing to a multifaceted trend beyond just currency substitution.
The report concludes that while the yuan’s rise does boost dedollarisation efforts and offers an alternative anchor in global finance, it operates within a wider landscape of financial decentralisation influenced by digital currencies, geopolitical tensions, and evolving trade relationships rather than causing a sudden or dominant shift away from the US dollar.
If trends continue as they have for the past decade, a move away from the US dollar is set to be a very slow process, with the USD remaining the largest currency for foreign exchange reserves for many decades to come. The report will monitor dedollarisation as it continues to evolve and report on any significant changes to the current status quo.
[1] Lucy Ingham, Editor-in-Chief and Head of Content at our platform, states that the narrative of countries stepping away from the US dollar in favor of China's yuan is overstated. [2] The report assessed available datasets on foreign exchange reserves, cross-border payments, and currencies in Chinese trade. [3] The US dollar's share of global allocated foreign exchange reserves has declined, but not solely to the Chinese yuan; it has also decreased to a broader range of currencies including the Canadian and Australian dollars, the Japanese yen, and British pound. [4] The report suggests that dedollarisation is happening, but it is not simply a shift to the yuan. [5] The yuan is forecasted to see continued growth, but will only reach 6% of global currency reserves by the end of 2034. [6] The US dollar has risen to 60% of non-Eurozone cross-border Swift payments in November 2023. [7] Data on cross-border payments from Swift shows a rise in the yuan's share of global customer-initiated and institutional Swift payments, but there has not been a move away from the US dollar over the same period. [8] The report finds that dedollarisation is more nuanced and complex, indicative of a global trend towards a more decentralised range of financial power. [9] It is not happening due to a strong shift to any single other currency, including the yuan. [10] The report will monitor dedollarisation as it continues to evolve and report on any significant changes to the current status quo. [11] The report concludes that the world is slowly drifting from its reliance on the US dollar as the global second currency, but it is not an acute or rapid occurrence.
[1] In the context of global finance, the rise of the yuan and the process of dedollarisation are significant, yet nuanced, phenomena that are part of a broader trend towards financial decentralisation.
[2] While the yuan's growth is boosting dedollarisation efforts, it does not constitute a sudden or dominant shift away from the US dollar. Instead, the US dollar's decline is being observed across a diverse range of currencies, including the yuan, the Japanese yen, the Canadian and Australian dollars, and the British pound.
