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For more than a decade, Beijing has been trying to reduce its reliance on the dollar, motivated by risks emerging from the US economy – such as the financial crash of 2008 – and the desire to boost its own sphere of influence.
But in the last year, a drive to insulate China’s economy from dollar-based sanctions has emerged as possibly the most important incentive for decoupling from the dollar, as China looks to prepare for the possibility of conflict with Taiwan.
After Russia’s invasion of Ukraine, one of the most powerful tools for inflicting economic harm on Moscow was to essentially cut the country off from transactions based on US dollars, limiting its ability to trade with other countries.
But as well as punishing the Kremlin, there has been an unintended winner from west’s sanctions regime: the Chinese yuan. Last year the share of Russian imports paid for in yuan rose from 4% to 23%. In February the yuan overtook the dollar as the most traded currency on the Moscow exchange for the first time in its history.
China’s push to boost the internationalisation of its currency predates the war in Ukraine and although the yuan is still far behind the dollar in terms of global activity, between March 2021 and March 2023 its share of the trade finance market – the multi-trillion dollar ecosystem that underpins 80% of world trade – more than doubled, according to data from Swift, an interbank messaging platform.
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