China Trying to Replace Dollar with Yuan

At their recent summit in Uzbekistan, members of the Shanghai Cooperation Organisation (SCO)—a prominent regional organization led by China and Russia—agreed on a road map to expanding trade in local currencies. A road map for using local currencies in trade and developing alternative payment and settlement systems has been part of the SCO’s economic plan for years.

This agenda is in line with individual policies on the part of the group’s most prominent members, including Russia’s attempt to cushion the blow of Western sanctions, China’s deteriorating relations with the United States, India’s use of nondollar currencies in its trade with Russia, and Iran’s recent proposal for a single SCO currency.

Chinese President Xi Jinping proposed to address development deficits through regional integration, especially by expanding the shares of local currency settlements, strengthening the development of local-currency cross-border payment and settlement systems, and promoting the establishment of an SCO Development Bank.

Xi did not openly discuss the geopolitical risk of U.S. dollar dependence when addressing the recent SCO summit. However, his proposal reflected Chinese leaders’ deep concerns about the vulnerability of the Chinese economy to U.S. dollar hegemony and their desire to develop alternative systems to hedge against the risk of the dollar’s dominance.

Beijing is not, for now, attempting to make the yuan an internationalized currency. It does not seek to dethrone the U.S. dollar and replace the dollar’s dominance in the global system with the yuan. Instead, it is taking steps to make the yuan a regionally powerful currency through local institutions in China and regional intergovernmental organizations such as the SCO. 

Beijing wants to increase the use of the yuan in China’s cross-border trade settlements and investment, reduce its dependence on the dollar, minimize exchange risk and dollar liquidity shortage, and maintain access to global markets during geopolitical crises.

China’s de-dollarization initiatives are not only implemented by the central government in Beijing. Some of the initiatives have also been carried out by local governments and local financial institutions. One example is the Sino-Russian Financial Alliance. In October 2015, China’s Harbin Bank (a city commercial bank) and Russia’s Sberbank (the largest savings bank in Russia by assets) initiated the Sino-Russian Financial Alliance as a nonprofit cross-border financial cooperation organization. 

The alliance’s primary goal is to establish an efficient mechanism to support Sino-Russian trade, facilitate comprehensive bilateral financial cooperation, and promote the use of local currencies in bilateral settlements. This financial alliance had 35 initial members, including 18 Chinese financial institutions (small and medium-sized banks, insurance companies, and trust investment companies) and 17 Russian institutions. When the alliance was launched, Sun Yao, vice governor of Heilongjiang province, said that the alliance “is an important platform to facilitate the development of the China-Mongolia-Russia Economic Corridor.”  READ MORE...