For more than a decade, Beijing has been trying to reduce its reliance on the dollar, motivated by risks emerging from the US economy – such as the financial crash of 2008 – and the desire to boost its own sphere of influence.
But in the last year, a drive to insulate China’s economy from dollar-based sanctions has emerged as possibly the most important incentive for decoupling from the dollar, as China looks to prepare for the possibility of conflict with Taiwan.
After Russia’s invasion of Ukraine, one of the most powerful tools for inflicting economic harm on Moscow was to essentially cut the country off from transactions based on US dollars, limiting its ability to trade with other countries.
Bringing Taiwan under the control of the Chinese Communist party (CCP), is the “inevitable requirement for the great rejuvenation of the Chinese nation,” China's president Xi Jinping said in 2019. In recent years, as an increasing proportion of people in Taiwan say they want nothing to do with the CCP, China’s agitation to resolve the “Taiwan issue” has grown stronger. Xi sees “reunification” as an important part of his legacy and has not ruled out the use of force to achieve that aim.
A war with Taiwan - which would soon involve regional neighbours and the US - would be devastating for both sides, as well as the global economy. But many experts think it could arrive in the next decade, or even the next five years. Before launching such an attack, China would have to prepare its economy, its military, its self-sufficiency in key commodities and win over potential allies. This series looks at the steps that Beijing is already taking.
But as well as punishing the Kremlin, there has been an unintended winner from west’s sanctions regime: the Chinese yuan. Last year the share of Russian imports paid for in yuan rose from 4% to 23%. In February the yuan overtook the dollar as the most traded currency on the Moscow exchange for the first time in its history.
China’s push to boost the internationalisation of its currency predates the war in Ukraine and although the yuan is still far behind the dollar in terms of global activity, between March 2021 and March 2023 its share of the trade finance market – the multi-trillion dollar ecosystem that underpins 80% of world trade – more than doubled, according to data from Swift, an interbank messaging platform.
China is also encouraging other countries to adopt the yuan for international transactions. Argentina and Brazil recently reached agreements to pay for Chinese imports in yuan rather than US dollars.
In April Bangladesh announced that it had approved a payment in yuan worth $318m to settle part of a Russian loan that had been used to finance a nuclear power plant development. It is a rare example of the yuan being used for an international transaction that does not involve China.
Daniel McDowell, a China fellow at The Wilson Center, a thinktank, said: “To date, international use of the RMB as a payment currency has primarily involved China on one end of the deal.”
“To do business with Russia, foreign partners do not really have alternatives – they will have to consider using less traditional payment currencies, like RMB and rubles”.
A defence against sanctions
China’s economy is far more intertwined with the west’s than Russia’s is, and many analysts think it would be impossible for the west to punish China economically without inflicting massive self-harm.
Still, China wants to protect itself as much as possible, and the internationalisation of the yuan is one part of that defence.
In March, a Chinese company used yuan to buy 65,000 tons of liquefied natural gas (LNG) from TotalEnergies, a French multinational, the first time that China’s currency has been used in an international LNG transaction.
Beijing does not want to be dependent on the use of dollars for essential imports, so this is a key step in ensuring China’s energy security. In an article published last year, Xu Jin, the chief economist at China Energy, a state-owned company, wrote that China “must work faster to drive the internationalisation of the RMB” in order to protect its energy supplies in the wake of sanctions on Russia.
China has also developed an alternative to Swift as well as a digital currency, the e-CNY. These technological innovations are less important than the political factors that influence the yuan’s international popularity, but they are part of Beijing’s broad campaign to transform its currency into an attractive alternative to the dollar.
The campaign to decouple from the dollar is also linked to national pride. A recent report on China’s quest for financial self-reliance notes: “By definition, China can’t claim to be a great power … if it continues to rely on the dollar for trade, foreign borrowing, and the pricing of energy and commodities.”
But for China’s leaders, a more prominent international role for the yuan needs to be balanced against the party’s grip on domestic financial markets.
Truly internationalising the yuan would mean loosening the government’s control over capital flows and allowing the market to play a bigger role in the currency’s valuation. That is not a risk that the party is willing to take, either politically or philosophically. A central tenet of its economic philosophy is that the state should have a prominent role in the economy.
Alexander Gabuev, a senior fellow at the Carnegie Endowment for International Peace, notes: “It’s not the invisible hand,” that the party wants controlling the market, “it’s the very visible hand of the state regulators.”
“A more prominent role for the RMB in the global financial system is a nice to have thing. But domestic financial stability is a must-have thing if you want to keep the country running and stay in power”.
