Dedollarization: A Yuan Tale

Countries are starting to settle trade in local currencies rather than U.S. dollars, and warnings of the dire consequences are heating up. They range from serious policy analyses on sanctions to conspiracy theories designed to sell investment information.

Interest in the concept of “dedollarization” began to rise toward the end of the first quarter of 2023, spiking up at the end of April, Google Trends shows.

Dedollarization first caught my eye in LinkedIn posts featuring a short clip of Russian Federation President Vladimir Putin saying Russia would start to settle oil payments using the Chinese yuan. The development of a central bank digital currency by the People’s Bank of China, the eCNY, also known as the digital yuan or RMB, has spawned theories about the impending replacement of the U.S. dollar as the world’s reserve currency for some years.

The latest spike in Google searches no doubt comes from Elon Musk opining on dedollarization through Twitter comments supporting a video on the subject. The video paints a picture of the fast-approaching demise of the dollar, leading to dire economic consequences for the U.S. economy. In this telling, the culprit is President Joe Biden and his weaponization of the dollar through sanctions, most recently on Russia.

The concern over sanctions policy is real and not new. The crux of recent reports concerns various bilateral deals made regarding oil payments, some using local currencies and others settling in yuan.

“The shiny objects, of course, are the deals being done to trade oil using yuan,” Lyric Hughes Hale, editor in chief of EconVue told me. “Somewhere along the chain, that money will turn into dollars.” Lyric is a writer and strategist on China, and I turn to her when I want to know about Chinese economic policy.

“De-dollarization is not a simple process, nor is it inevitable. Or necessarily in China’s interest,” she tweeted on March 31, 2023.

For one, China’s eCNY system is a closed loop with all transactions visible to the People’s Bank of China. Even if trust in the U.S. currency is deteriorating as a result of economic sanctions, the Chinese economy is not exactly high in trust, and its currency isn’t exactly open to trade.

“China does not have an open capital account, and the Chinese cannot liberalize this soon. Their economy is just too weak,” Lyric says. “There are no deep markets for fast trading of the yuan as there are for the dollar. To be a reserve currency means that you have to have a trade deficit by definition and I do not see China’s export-led economy allowing that anytime soon.”

Countries will increasingly trade in their own currencies, led by EUR. Given recent usage statistics tracked by the SWIFT bank messaging organization, RMB use will ebb and flow. You can track that through the SWIFT RMB Tracker. I looked at the April tracker, so you don’t have to. The percentage of trade settled in RMB between 2019 and 2023 generally ranged between 1.8% and 2.4%, with lows of about 1.6% and a high of some 3.2%.

What’s more likely than wholesale dedollarization for the foreseeable future is “multi-polarity,” a polite term for the end of U.S. global dominance.

“Long term, we will have a world of financial multipolarity and many more options than exist today,” Lyric predicts. “The people who make the architecture that support that will create immense wealth.”

I highly recommend Lyric’s paid newsletter on China. Check out her newsletters here:

– Collin Canright