China's Shift Away From The USD Marks The Beginning Of De-Dollarization

China's Cross-Border Payments No Longer Dominated by USD

Up until the first quarter of 2023, the U.S. dollar (USD) was the main currency used for the majority of China's cross-border payments, a common practice among many countries since 2010. However, this is no longer the case.

Increasing Popularity of the Chinese Renminbi

Julian Wendling from Visual Capitalist presents a graphic from the Hinrich Foundation that shows the increasing use of the Chinese renminbi (RMB) in both domestic and global payments.

China's Cross-Border Transactions and the De-Dollarization Process

Data from Bloomberg on the share of China's payments and receipts in RMB, USD, and other currencies from 2010 to 2024 was used for this analysis. In the early months of 2010, less than 1.0% of China's cross-border payments were settled in local currency, while around 83.0% were in USD. However, China has managed to close this gap. In March 2023, the RMB's share in China's settlements exceeded that of the USD for the first time. Since then, the de-dollarization of Chinese international settlements has continued. As of March 2024, more than half (52.9%) of Chinese payments were settled in RMB, while 42.8% were in USD. This is double the share from five years ago. Goldman Sachs attributes this shift towards de-dollarization to the increased willingness of foreigners to trade assets denominated in RMB. Additionally, Brazil and Argentina announced last year that they would start allowing trade settlements in RMB.

Most Used Currencies in Foreign Exchange Transactions

According to an analysis from the Bank for International Settlements, the USD was still the most commonly used currency for FX settlements in 2022. The euro and the Japanese yen were the second and third most used currencies, respectively. Although the Chinese renminbi accounted for a relatively small share of FX transactions, it has gained the most ground over the last decade. On the other hand, the euro and the yen have seen decreases in use.

The Future of De-Dollarization

If the RMB continues to rise globally, the USD's dominance in international trade could diminish over time. The implications of a declining dollar dominance are complex and uncertain, but they could range from the underperformance of U.S. financial assets to a reduced power of Western sanctions. However, a complete de-dollarization of the world economy in the near or medium term is unlikely. China's strict capital controls, which limit the availability of RMB outside the country, and the nation's slowing economic growth, are major factors contributing to this.

What's Your Take?

This shift in global currency dynamics is certainly intriguing. What are your thoughts on China's move away from the USD and the potential implications of de-dollarization? Do you think this trend will continue, or will the USD retain its dominance? Share this article with your friends and let's get the conversation started. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.