The global economic landscape has witnessed significant changes since the beginning of the 21st century, with China emerging as a prominent economic player. Beijing is now considered the second-largest economic power after the United States.
According to the World Bank in 2021, China’s Gross Domestic Product (GDP) reached $17.7 trillion, representing 18.4% of the global GDP, which stood at $96.1 trillion. The Chinese economy has made remarkable progress on the global stage in various areas, including international trade, extending loans to developing and less-developed nations, and technology development. This is a significant part of the economic rivalry between China and the United States.
Rising Chinese Exports
In 2021, Chinese exports reached $3.36 trillion, while imports amounted to $2.68 trillion, resulting in a trade surplus of approximately $676 billion. Since 2016, China has successfully boosted the international presence of its local currency, the Yuan, through agreements with the International Monetary Fund (IMF). This move has made the Yuan a part of foreign exchange reserves for other countries. It means that other countries can use the Yuan in their trade and financial transactions with China, encouraging the holding of Yuan by various central banks.
China has also been establishing Yuan-based clearing centers in several regions around the world, including Qatar and the United Arab Emirates in the Gulf region, as well as other areas in Asia and Europe. China has pledged to provide the Yuan to countries willing to use it.
As a Foreign Reserve Currency
The Yuan currently ranks fourth globally as a foreign reserve currency, accounting for 2.8% of the total foreign exchange reserves held by central banks. This reflects significant progress since 2016 when it had a share of only 1.08%.
China is expected to continue enhancing the Yuan’s international status in the coming years as a currency for financial and trade settlements. It also plans to issue international bonds denominated in Yuan.
China’s Role in Lending
China has provided bilateral loans estimated at around one trillion dollars to developing and less-developed nations, making it a competitor to international financial institutions in lending to these countries.
Benefits of Making the Yuan a Settlement Currency
The move to make the Yuan a settlement currency in China’s financial and trade transactions with other countries has multiple benefits. Firstly, it reduces China’s financial and monetary dependence on the United States and its policies. If the world can use the Yuan in dealings with China, it diminishes the impact of US monetary policy on the Chinese economy and enhances its independence.
Secondly, this step increases the likelihood that central banks around the world will include the Yuan as part of their foreign exchange reserves, thus bolstering the Yuan’s position in the global financial system.
Impact on the Dominance of the US Dollar in International Settlements:
Despite the Yuan’s increasing international status, the US dollar still maintains a very strong position in international settlements. The US dollar currently represents about 41% of the world’s foreign exchange reserves, 60% of global payment currencies, 60% of international debt, and 52% of international loan payments. For the Yuan to challenge the dollar in these areas, it will require substantial economic growth and international confidence in China. The dollar has a long history and a strong position in these areas, and thus, the Yuan must achieve more economic strength and international trust to compete with the dollar on a global scale.
