FX.co ★ Chinese yuan dominance: myth or reality?

The influence of the Chinese currency on the international market is becoming more noticeable. However, it will take the yuan a long time to remove the US dollar from the pedestal of the safe-haven.

Over the past few months, the American currency has lost its strength. Therefore, experts often say that the US dollar is losing its dominant position. However, not everyone supports this opinion. As the analysts said, there is no alternative to the US dollar today. The euro and the Chinese yuan are imperfect. However, China has a strong influence on the world's economy, so the yuan is gaining importance.

However, there is no point to forget that the Chinese currency is not a freely convertible currency yet. Beijing has imposed strict foreign exchange restrictions. Foreigners cannot use the yuan at any time. But, as soon as the restrictions are lifted, the yuan will have all chances to become a universal means of payment on a par with the US dollar and the euro.

Experts at the Singapore bank DBS believe that tensions between China and Beijing have provoked an increase in Beijing's activity on the internationalization of the yuan. Now, it is the sixth important currency in international settlement.

Moreover, the Association of Southeast Asian Nations is China's largest trading partner now. That is why the payment currency in cross-border trade will be the Chinese yuan.

The Chinese currency has been showing growth for a long time. It rose to 6.8239 per greenback. This is the highest level in almost 16 months.

Strategist Sven Schubert said that China's Belt and Road Initiative project has great influence on the Eurasian region and Africa. Finally, it may lead to the wide yuan's usage in world trade contracts.The planned completion date of the project is 2049.

Moreover, Mr. Schubert believes that the partnership of China and Russia will reduce dependence on the US dollar. As the Bank of Russia reported, the country restocks the yuan's reserves. Over one year, reserves boosted from 2% to 14%. At the same time, Russia is reducing its share in the US dollars. Over the same period, the country cut the US dollar's reserves from 30% to 9.7%. As a result, the share of the greenback in trade payments between China and Russia collapsed below 50% for the first time since the beginning of 2020. The strategist also believes that the yuan is undervalued and the situation may change in the near future.

He noted that about 50% of world trade contracts are still quoted in the US dollars, despite the fact that the country accounts for only about 12% of world trade.

Eswar Prasad, a professor of trade at Cornell University, believes China will gradually gain recognition of the yuan through its efforts to open up its financial sector.

Some of China's stocks were included in the global and regional MSCI indices. The bond market was also included in the Bloomberg Barclays Index. The trade is carried out in the yuan. As Chinese assets are increasingly traded in global markets, foreigners will have to trade in the yuan. Thus, China is getting closer to its goal of internationalizing its currency.

Mr. Parsad believes that the heightened tensions between China and the United States are beneficial for the Chinese yuan. As a result, China could weaken its dependence on the United States. However, he noted that the yuan will not soon become a serious competitor to the dollar in world financial markets.

Mr. Schubert, in turn, believes that the currency's leadership depends on the economic importance and technological superiority in which China excels.

It looks like the US is annoyed. The states are pressing Chinese tech companies by imposing sanctions on phone maker Huawei and shutting down TikTok and WeChat apps.

The contradictions between countries have also led to the splitting of the Internet. Now, the Internet oriented towards China will increase the country's influence in the Asian region. Internet networks will be closely linked to Chinese technology and, as a result, the Chinese yuan will be used more and more.