China's de-dollarization, increasingly accentuated

Since 2010, most cross-border payments of China, as well as many other countries, have been settled in US dollars. From the first quarter of 2023, however, the situation has changed.

A Hinrich Foundation analysis based on Bloomberg data on the share of China's payments and receipts in yuan, dollars and other currencies from 2010 to 2024, obtained by visualcapitalist.com, shows that in the first months of 2010, currency settlements local currencies accounted for less than 1% of China's cross-border payments, compared to about 83% in dollars. Since then, China has narrowed this gap. In March 2023, the yuan's share of China's payments surpassed that of the dollar for the first time.

Since then, the de-dollarization of Chinese international payments has continued. In March 2024, over half (52.9%) of Chinese payments were settled in yuan, while 42.8% were settled in dollars. The proportion is double what it was five years ago.

According to Goldman Sachs, the increased willingness of foreigners to trade yuan-denominated assets has contributed significantly to the de-dollarization in favor of China's currency. Also early last year, Brazil and Argentina announced that they would begin allowing commercial settlements in yuan.

Globally, Bank for International Settlements analysis shows that in 2022, the dollar remained the most used currency for foreign exchange settlements (88.5%). The euro and the Japanese yen ranked second (30.5%) and third (23%), respectively. It is followed by the British pound (12.9%), the yuan (7%) and others (44.4%). Although the yuan represents a relatively small share of global currency transactions, it has gained the most ground over the past decade (+4.8%). Meanwhile, the euro and yen saw declines in usage: -2.9% and -6.3% respectively. In the case of the dollar, an increase of 1.5% was observed, and for the pound - of 1.1%.

If the yuan's global rise continues, the dollar's dominance of international trade could diminish over time, according to the source cited. The effects of the decline in dollar dominance are complex and uncertain, but could range from the underperformance of US financial assets to the weakening of Western sanctions.

However, while the prevalence of the yuan in international payments may increase, a complete de-dollarization of the world economy is unlikely in the short to medium term. China's tight capital controls, which limit the availability of the yuan abroad, and the Asian country's economic growth are key contributing factors.