The Chinese yuan steadily improves its position in the global market at the expense of the US dollar

By Subrata Majumder

As the year 2022 progressed with a focus on the new FTP (Foreign Trade Policy) for 5 years, which was delayed, world trade underwent major changes with the trade conflict between the US and China, followed by COVID 19 and Russia’s invasion of Ukraine. The main deterrents as consequences are supply chain constraints and obstacles in energy supply, because China is the global workshop powerhouse and Russia is the energy supply giant.

Amid global trade turmoil, the main issue for the new FTP is how to increase India’s export competitiveness, while tax incentives such as tax coupons and tariff remission become vulnerable to repeated US warnings for non-compliance with WTO rules.

The war in Ukraine revealed a new dimension in the global trade pattern, which must be tapped into by a new payment mechanism, as the US dollar is losing prominence and the Chinese yuan is gaining importance in the foreign exchange reserves of the central banks of the world. world. According to Mr. Ruchir Sharma, an eminent global investor, “Frightened by the impact of US financial sanctions on Russia, many nations are looking for ways to reduce dependence on the dollar.”

According to the IMF report, the US dollar’s share of the world’s chest of foreign exchange reserves is declining. The IMF’s official composition of foreign exchange reserves (COFER) revealed that despite global foreign exchange reserves rising to US$12.85 trillion at the end of the third quarter of 2021, the US dollar’s share decreased to 59, 2 percent.

The Big Four, viz. The US dollar, the British pound, the Japanese yen and the euro hold dominant shares of world foreign exchange reserves. They accounted for 98 percent in 1999. It fell to 92 percent in 2021. The report further revealed that three other coins failed to fill the gap. Instead, the world’s central banks were diversifying their holdings of non-traditional currencies. According to the report, the global holding of non-traditional currencies increased from negligible levels of 0.2 percent (US$30 billion) in 1999 to around 9.1 percent (US$1.2 trillion) by 2021. Chinese yuan (renminbi) has become dominant in four non-traditional currencies. traditional foreign exchange reserves. The other three are the Australian dollar, the Canadian dollar, and the Swiss franc. These four accounted for 71 percent of non-traditional currencies in global foreign exchange reserves.

At the end of 2020, the Chinese yuan was the largest non-traditional currency component in global reserves. It represented 25 percent in central banks worldwide. These demonstrate that the Chinese yuan is rapidly emerging as a global currency for trade and paves the way for de-dollarization. In 2016, the Chinese yuan became the first emerging market currency included in the IMF’s Special Drawing Rights (SDR). Until that time, only the Big Four had the privilege of being in the SDR.

The factors, the potential to pawn the Chinese yuan in a challenge to the US dollar, are China’s large share of global trade, namely 15 percent by 2020, and China being the global manufacturing powerhouse. It represents a quarter of the global supply chain. In addition, Russia insists on the ruble for trading in oil, the world’s second largest oil exporter, in the wake of the Ukraine war and the rise of the Chinese yuan in Russian foreign exchange reserves, which helps the Chinese yuan emerge as a future currency for world trade.

Due to increased trade and political relations, Russia expanded its currency deals with the Chinese yuan. Eventually, while the Chinese yuan’s share of Russia’s foreign exchange reserve holding jumped from 12.8% in January 2021 to 17.1% in January 2022, the US dollar’s share fell by half from 21, 1% to 10.9% during the same period.

China has been India’s largest trading partner for a period of six years, except for 2018-19 and 2020-21. India exports less and imports more from China. Although oil and petroleum products are the main import items, China is India’s main import destination. Nearly a sixth of India’s global imports are generated from China, compared to 5-7 percent of India’s exports to China. Given this, it is imperative that India exports more to China to offset its large trade deficit.

Currently, all trade between India and China is exchanged through the US dollar per se. As the Chinese yuan is not a global currency, it is more stable than the US dollar. In this context, the yuan-based payment mechanism can play an important role in increasing the competitiveness of India’s exports.

A small interest rate increase by the Federal Bank increases the value of the US dollar and makes Indian products uncompetitive in the global market. Since the Chinese yuan is less susceptible to global fluctuations due to the change in the federal interest rate, Indian products may be more competitive to export to China and find a larger space in the Chinese market. Not only in the Chinese market, but also in other Asian markets, it will increase the competitiveness of India’s exports, which mainly exports to China. This is because the scope is widened for yuan trading as Chinese yuan reserves are increasing in global central banks.

Exports to Vietnam can be a good example. India’s largest import items from China are electrical and electronic items. They are the springboard for expanding trade between India and China. China is Vietnam’s largest trading partner. Vietnam’s largest export and import items from China are electronic and electrical items. Incidentally, in recent years, Vietnam became a major exporter of electrical and electronic products to India. It was the second largest exporter of electrical and electronic products to India in 2020-21, after China. Given these dimensional changes in trade structures, the Chinese yuan may tap into the potential to be the traded currency between Vietnam and India.

The RBI governor called for the need to increase India’s non-dollar foreign exchange reserves. India has already started this exercise, according to him. (IPA service)

The publication Chinese yuan steadily improves its position in the global market at the expense of the US dollar appeared first on IPA Newspack.

Leave a Comment