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Russia sanctions might increase impetus for Chinese yuan

The invasion of Ukraine by Russia has led to the most intense financial sanctions by Western countries against another country in modern history. Two financial sanctions stand out in particular. Firstly, the decision to block the majority of Russian banks from SWIFT, the global messaging system that enables them to transfer money across the world. This measure is backed by the major world economies such as the European Commission, France, Canada, Germany, Italy, Japan, the UK and the US.

Secondly, these countries also agreed to prevent the Russian Central Bank  from using its international reserves held by these countries to undermine sanctions.

It is important to note is that China, the second largest economy globally, did not join in introducing sanctions against Russia. China also abstained during the UN General Assembly vote and followed a toned-down condemnation approach by stating that sanctions are not the solution to the problem.

The question now is: does the Chinese yuan have the potential to crowd-out the dollar as the eminent global reserve currency? More than half – 55% – of all central bank currency reserves are still held in US dollars and 19% in Euros. But a clear shift has gradually been taking place. The most notable has been the decline of the US dollar as reserve currency, down from 69% in 2007.

The yuan now holds the fifth position in the Currency Composition of Official Foreign Exchange Reserves after the US dollar, the Euro, the Japanese Yen and Pound Sterling. The yuan’s share is a mere 2.5% of official foreign exchange reserves. But its share has increased, dramatically so since 2016.

Source: theconversation.com


Photo source: Dreamstime.com

 


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