Yuan and Probability of it taking over a world trade

  1. Yuan and Probability of it taking over a world trade

What happened?
● Reports emerged that Indian oil refineries have begun paying for some oil
imports from Russia in Chinese Yuan.
● This move came after the Russian suppliers reportedly refused to accept
payment in Indian Rupees, citing the currency’s high ‘volatility’.
● Sources suggest that the state-owned Indian Oil Corporation and at least
two of India’s three private refineries were involved in Yuan transactions.
Why does it matter?
● The international sanctions imposed on Russia have caused the country to
be dropped from dollar and euro-based financial networks.
● Consequently, Russia and its customers have been searching for
alternatives for dollars to settle payments.
● In May 2023, Russian oil accounted for about 40% of India’s crude imports.
Previously, the two countries had agreed to establish a Rupee-Ruble
mechanism.
● However, the negotiations fell through and India was forced to take the
Yuan route.
● Observers believe that the rise in Yuan payments for foreign trade results
from China’s efforts to internationalize its currency and provide it as a
viable alternative to US Dollars.
What are the arguments from both sides?
Side 1: Yuan will take over foreign trade:
● De-dollarisation efforts: China has been determined to elevate the
yuan’s status as a global currency and has made substantial efforts
to achieve this goal in recent years.
○ For instance, it has established agreements with countries
such as Kazakhstan, Pakistan, Laos and Brazil to use the yuan
for cross-border transactions, replacing the dollar.
● Effects of sanctions: As a consequence of the sanctions against
Russia, Yuan has replaced the dollar as the most-traded currency in
the country.
○ Russia has begun receiving payments in Yuan for coal and gas
from countries like China and India. Moreover, Russian
companies like Rosneft have issued bonds denominated in
yuan.
● Dollar’s dominance questioned: The use of the dollar in economic
warfare and the US’s error-prone economic policies have been
eroding the world’s trust in the currency.
○ For instance, between November 2022 and January 2023, the
nominal broad dollar index fell almost by 7% (the dollar index
is a measure of the dollar’s value relative to other major
currencies).
Side 2: Yuan will NOT take over foreign trade:
● Gradual process: Although Yuan’s share in global trade has doubled
in the last decade, it’s still only at 2.5%. In contrast, the dollar
accounts for 43% of global trade payments.
○ Therefore, economists suggest it will take Yuan decades to
displace the dollar.
● Roadblocks: The Chinese government has a tight grip on the
country’s financial markets. Such control and limited transparency
make Yuan unfavourable for free market flows.
○ Moreover, China has been accused of devaluing Yuan to boost
the country’s exports.
○ The devaluation prompts foreign buyers to purchase more
Chinese products.
○ Such instances of manipulation erode the market’s trust in
Yuan.
● Trust in Dollar: The dollar has been the global trade currency for
decades.
○ Moreover, the dollar is also the world’s dominant reserve
currency (a currency held by governments and institutions as
a backup. It’s used for settling debts and carrying out
international transactions).
○ Despite economic blows to the US, markets worldwide trust the
dollar significantly.
○ The open market favours the dollar’s growth even more.
Therefore, it’s impossible for Yuan to compete with the dollar.

Now what ?
● The reports suggesting that the Indian oil refineries have paid in Yuan are
based on the disclosure of the sources closely connected to the trade.
● There has been no official confirmation in this regard yet. Due to India’s
strained relationship with China, experts have suggested that UAE’s Dirham
be used as the third currency in Russia-India tr

 

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