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De-dollarization is not working out in China, where businesses are hanging onto their US dollars

Huileng Tan   

De-dollarization is not working out in China, where businesses are hanging onto their US dollars
  • Chinese businesses are holding back from converting their foreign-exchange earnings to Chinese yuan.
  • This is because of the yuan's weakness against the US dollar and higher offshore interest rates.
China has been trying to expand the clout of the Chinese yuan amid a broader trend to diversify away from the US dollar.

But even Chinese businesses aren't sold on the yuan right now.

Official data from the People's Bank of China, the country's central bank, shows that foreign-exchange deposits rose from $778.9 billion in September to $832.6 billion in March.

This means some Chinese businesses have been holding back from converting their foreign-exchange earnings into their home currency.

This development appears to be primarily because of weakness in the yuan — which has hit five-month lows against the US dollar after losing nearly 2% to the greenback this year to date. The longer-term trend has been even more negative, as the yuan has fallen 5% since the start of 2023 — discouraging manyChinese companies from converting their dollar earnings to yuan.

Chinese exporters are also biding their time to convert their earnings because interest rates outside the country are high. Reuters reportedon Wednesday that businesses were parking their US dollars offshore in deposits that earned them 6%, compared with 1.5% on yuan deposits at home.

Becky Liu, the head of China macro strategy at Standard Chartered, told Reuters that Chinese exporters probably needed a "confirmation of the Fed rate cut including a clearer dollar-softening trend" before they'd be willing to convert more of their offshore dollar earnings to yuan.

While Chinese businesses are hanging onto their dollars because of yuan weakness, this trend also illustrates the challenges facing currencies such as the Chinese yuan in a world dominated by the US dollar.

It also proves it's not so easy to displace the mighty US dollar as the world's top reserve and trading currency of choice. And that, in turn, is good news for the US: It means the US can maintain its economic clout and borrow quickly and cheaply for its industrial policy and social programs.

More talk than action on de-dollarization last year

Recent data from the International Monetary Fund confirms the dollar is still king. That's even amid discussions about de-dollarization that were fuelled by concerns over the greenback's power following sanctions against Russia that shut it out of the dollar-based global financial system.

The IMF data, published in late March, showed the US dollar accounted for nearly 60% of global foreign reserves. The greenback's share of global foreign reserves also edged up 0.2 percentage points in 2023 — in contrast to the yuan's share, which fell over the same period for the second straight year, according to an ING bank analysis.

This is in part because Russia used to hold about one-third of global yuan reserves before 2022, when it invaded Ukraine. Moscow had to use some of that money to plug its budget deficit last year, contributing to a fall in the yuan's share in the world's global reserves.

But Dmitry Dolgin, the chief economist for Russia and CIS countries at ING, wrote in a note published on April 10 that this didn't mean "yuanisation" was off the agenda.

After all, China is still promoting the yuan's usage globally, including through the broadening of bilateral swap lines and the growth of China's yuan-based CIPS messaging system as an alternative to SWIFT.

Dolgin wrote: "It appears that China's expanding trade ties and financial infrastructure suggest that the potential for further yuanisation has not been exhausted."


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