The US dollar is the most important currency for transactions between companies and between nations around the world.
King Dollar does still dominate.
You don't really have a choice that you have to basically engage in US dollars if you want to participate in the kind of global financial system.
Not so for China's currency, the yuan or renminbi. You'll often hear those used interchangeably. It accounts for just a tiny fraction of global transactions. But China's president Jijenping is out to change that. He's pressing to make the yuan a rival to the dollar. I'm wes Kosova today on the big tag can the yuan not king Dollar off its throne? As you might imagine, the answer to that question is complicated. Fortunately for US, Bloomberg's George Lay is
here to break it down in plain language. George, one of the reasons why the US is so important to the world economy is that the dollar is the most widely used currency in the world. Can you give us a picture of why the dollar is so important?
Basically, if we look at international transactions, international finance, or international trade, the dollar accounts for roughly half of all the global trade flows and If you count the Euro, that's another twenty five percent. So dollar and euro combined the account for roughly three quarters of all global transactions, whether it's person to person, whether it's between companies, and
whether it's between state entities. So, just to give you an example, if China wants to buy iron, ore or other commodities from Brazil, the most common kind of transaction currency is the US dollar, And if someone based in Canada wants to wire money to Mexico, the intermediary currency is the US dollar. So it gives the United States a lot of advantage, but it also raises a lot of questions among people elsewhere, especially among people and among countries that are not in the US and in Europe.
Back in April, when the President of Brazil visited Beijing, he asked a question, why should trades between China and Brazil be settled in the currency that is neither the Chinese you are nor the Brazilian reality.
Every night, I asked myself, why should every country have to be tied to the dollar for trade? Why can we trade tied to our own councy, and why don't we have the community to re it?
Okay, you know, compan do you not that. So a lot of countries want to to circumvent the US dollar as a payment currency for various reasons, economic reasons as well as political reasons.
So why is the dollar and to a certain extent, the euro why have they become the default currencies for so many international transactions.
A lot of it has to do with history, with the history of the global academy and global trade, because traditionally, if we look at the past thirty forty years, the US and European ecademies, they account for a big part of the global economy and a big part of the global trade. It is rapidly changing with China joining the picture. So China has been doing a lot of trades with other countries, non US, non European countries. So that's on
one hand. On the other hand, it is because the US and Europe provide the most liquid financial markets when it comes to using these currency. So if a country receives the US dollars, it can do a lot with these dollars. It could invest in US treasury markets, it could invest in US stock market, and it could invest them money in the US in terms of foreign direct investments, factories, and other stuff. The same rule applies in Europe, but
it is not really the case in China. China still has capital controls, So if you want to invest in Chinese bands, if you want to invest in Chinese stock markets, there are a lot more bureau credit controls than in US and Europe. So that also explains why countries would prefer to be paid in the US dollar and the euro instead of the Chinese yuan or the Brazilian reality or the Indian rupee.
But now you report that China is becoming more assertive in wanting to make the uan's currency a currency that plays in international markets much more.
Yes, that's exactly the case, especially after the war in Ukraine, because the leadership in Beijing witnessed the sanctions both by the US and by Europe piled upon Russia, and they realize that conducting transactions in the US and Europe might not be a safe choice. They really want to have some alternative just in case similar centris were imposed on China.
And this is also part of the general growing rivalry between the US and China.
Is that right?
Yeah? Exactly. So, as you mentioned, there this ongoing geopolitical rivalry between the US and China, and Beijing wants to have alternatives to everything that so far has been US dominated. Beijing is trying to get companies to listed in Hong Kong, which they think it's a safer choice as a financial
center than New York. Beijing is trying to push for domestically produced computer chips, and at the same time, Beijing is also trying to make sure that transactions, especially commodities, transactions that are vital to China's economy, that are vital to china national security, can be more or less settled in China's own currency instead of relying on the US dollar or the euro.
So you can see why China would want to do this, But what is the appeal to other nations to adopt Chinese currency instead of continuing to do transactions in the dollar of the euro.
I think first it's the diversification benefits. Let's take Russia for example. Before the war in Ukraine, China and Russia has also been pushing for the use of the Chinese rooming bee, but with very limited success.
But Russia plans to cut dollar holdings in wealth fun to zero.
After the war. The rooming bee payments and rooming bee transactions in Russia has really taken off. The Chinese UN has replaced both the US and the Euro as the most traded currency on the Moscow Exchange. So Russia might be in more extreme case because the country has been cut off from both US and eurofunding, so it has to rely on the Chinese ran. But it also serves as an example to other countries they see that using
the Chinese ruan could be a success. In the case of Russia, with the UN, the Russia could continue to export its oil to Beijing, and with the Chinese UN it could import a lot of goods which were produced by China. So we're not talking about the Chinese ruan replacing the US dollar or the euro. Actually, in the medium term, if we look at the next five to ten years, very few people are forecasting the Chinese you are surpassing the dollar or euro as the most important
currency of international trade. But the UN could provide some diversification benefits, and other countries could look at the geopolitical picture and say, hey, I don't want to put all my ads in the dollar and in the Europe. I could continue to be using the dollar using the Europe, but we could make five or ten percent of our trades in Chinese uan terms.
You mentioned specifically how Russia has been adapting Chinese currency for that reason to circumvent these sanctions. Is this a way that countries that are seeking to get around US sanctions are increasingly using just simply to avoid the dollar altogether.
I think it's still too early to tell, because if you look at the countries that are subject to a lot of US centrics, what we're talking about is Russia, Iran, North Korea. I think these are the most prominent examples. Russia is the country with the biggest economic size among all these we've talked about. Russia has a trillion dollar economy, and Russia has a lot of business to do with China,
and Russia has really a big consumer base. It's a country with population of more than one hundred million people. And also Russia is cut off from the eurosystem as well, where it runs oil exports can still be priced and executed in euros. So we're really talking about in the experimental case of a big country, a trilling dollar economy with more than one hundred million people that at this point they were forced off the eurosystem and forced off
the dollar system. But if it succeeds. China could just really take Russia as an example and go to other countries that are under US sanctions or that are not really on friendly terms with the US and say, hey, this could really work. Why don't you consider using my currency as well?
And can you explain how Russia using yuan would enable it to get around US sanctions? How does that actually work?
Because now let's take oil exports for them. Russia is not allowed to export oil to the US, it's not allowed to export oil to the European Union, but it is still permitted to export oil elsewhere. And still Russia exports oil to China and India, let's say, if they take their payments in the US dollars or in the euro. It is very difficult for Russia to dispose of these currencies because there are many restrictions on how or where Russia could deposit its affects reserves, how Russia can use it,
and what kind of products Russia can buy. But if in Russian entity still holds US dollars and euros and still make transactions in US dollars and euros, it is subject to a lot of restrictions. But if it holds the Chinese UN. It is subject to practically no restrictions. Of course, if you're holding the Chinese UN there are certain goods that you cannot buy. It's it's difficult for you to take the US and say, hey, I want to buy a BMW or I want to buy some
US products. But they could buy a lot of stuff that are produced by China, or buy countries that are not part of the euro or the US dollar system. Say they could buy Brazilian soy, they could buy Argentinian wheat. And now most of these transactions were still done in the US dollar euro. But if the RUN system becomes successful, they could take the gun and go to South America to buy a lot of food stuff. They could take the gun to China to buy cars, to buy machinery,
to buy druns. For example, a lot of the civilian news drones were exported by Chinese companies, so they could in the sense, replace a lot of its merchandise needs that are currently supplied by the US and by European countries.
After the break, Chinese currency slowly starts to work its way.
In Argentina will use the yuan for trade with China and then stop. This month, the Chinese National Oil Company completing its first LNG trade with France's Hotel Energy using the Chinese yuan. Saudi Arabia is in discussions with China to price some of its oil sales in Yon.
George, you mentioned Brazil as one country that's starting to question why everything is done in dollars in euros and are looking at Chinese currency as an alternative. What are some other countries that are doing the same.
Argentina, for instance, Argentina has a effect swap line with China, which means the Argentine Central Bank could access the Chinese yuan if it needs. There's a quota on it, but they could access a few billions of dollars worth of the Chinese uit and they are recently tapping that swap line Brazil, as we mentioned, and back in March, China and Saudi Arabia signed the deal in which a Chinese state bank lent money to Saudi Arabia in Chinese rooming
bee terms. They're increasingly more Western companies also using Chinese run as a settlement currency. In March, the French energy company Total Energy, they signed the deal with Chinese National Offshore Oil Corporation to settle a natural gas trade in the Chinese Rooming Bee and over the past couple of years Australian miners, including BHP, including real Tinto that have signed contracts with various Chinese state companies to settle iron
ore trades in the Chinese run. I think it's really symbolic in terms of China really pushing to have these transactions with companies based in developed countries, let's say a
French company or BHP in Australia. There's still a lot of hurdles for China to try to make you a sort of the default currents see you, or try to make you a major part of the transaction, because now if you're doing business with Friends or Australia, probably ninety nine percent of the transactions wouldn't be settled in the Chinese run. But at the same time, China is a major customer. China is one of the biggest buyers of natural gas, of oil, of iron ores, so it does
have some leverage. I think now people realize it is a major policy imperative from high up that China wants to get the remain me to play a bigger role in terms of trade, in terms of settlements, especially in
commodities trades. So Chinese state companies, which are the major buyers of these commodities, would really make the push to say, if I do business with you, I want a certain percentage of the deals settled in the Chinese run, whether you're a French company, an Australian company, or a Brazilian company. And I think these companies, the sellers, do have an incentive to satisfy the demands of the buyers in a sense,
to satisfy the demands of your client. So China could really make the push to have a certain amount let's say one percent or two percent of the total trade volume settled in un But once you want to push further, once you want to do let's say five percent or
ten percent. And these companies with the Chinese U and they still have limited access to Chinese markets, to Chinese starts, to Chinese bonds, so they might need to make reforms, make further reforms in their markets so that for companies having tens of billions of dollars worth of yourn, they need to find somewhere to invest in. China need to make its markets attractive to these investments.
If other developed countries start seeing more of these deals taking place. Do you think that will lead to an increase in the willingness of other companies other countries to take a look at this currency, even though it's not fully convertible.
Yeah, I think absolutely other companies and other countries would absolutely be looking at this and they would be thinking about this as an alternative, because if things go right, Chinese yuan has the potential to become the third widely used currency in terms of global trade and global finance.
Do you think that's going to happen? Do you think that China's currency will become the third major currency in the world at some point?
I think if they play the cards right, if they proceed with the same sense of urgency, if they and at the same time they really need to continue to make reform to their financial market, to their financial system over the next five to ten years, it's quite possible for the Chinese you and to become the third most used currency in global trade and global finance, exceeding all the other non dollar, non euro currencies that we're talking about,
Canading dollar, Japanese and British pound. The bar for them to get close to or even replace the dollar euro it is extremely high. And also we need to consider the scenario because now the US and Europe isn't really pushing back on any kind of the un settlement projects or un settlement deals. So now the Chinese un is roughly somewhere between one percent and two percent of global
trade and global finance global settlements. So once we reach a level of five percent or even ten percent, there is going to be I'm pretty sure there is going to be a strong response from US and Europe saying that we've got to stop this, because this is really threatening the role of the dollar into a less serch than euro in terms of the global financial ecosystem.
George, thanks so much for coming on the show Central West. When we come back, how China's currency push fits into the nation's larger global ambitions. What we're talking about today is part of a larger effort by Xi Jinping to increase China's stature in global affairs and of course his own as well. Bloomberg reporter Rebecca Chung Wilkins is back with us again today to tell us all about that. Rebecca,
China has become more ambitious on the world stage. We see Xi Jinping taking a bigger stance on international affairs, and now we see this move to make China's currency sort of a bigger player in international deals. How are those two things tied together?
For China, the internationalization of its currency has always been a critical part of kind of establishing it on the world stage and crucially establishing an alternative to the US. And of course we know the dollar has this extraordinary and unique dominance when it comes to the global currency
and what currency folks use. But over the last decade we've seen Beijing trying to make that push, and particularly for example, when we look at trade deals, policy makers in China often trying to incorporate or include some element of trade settlements in the UN as part of those deals.
There's been some some momentum already. However, it really is Russia's war in Ukraine and that sweeping set of sanctions that has seen the acceleration of Yun's use and actually has done far more than any policy maker in Beijing has ever been able to do to make it more commonly used in the world.
Which countries in particular have begun to take it. Advantage of this new arrangement, especially when the dollar now has become off limits to certain countries because of sanctions.
Well, if we think sort of purely in geopolitical terms, countries as their position somewhere between an allegiance or a leaning towards the US versus China, and what we tend to see is countries that may have an inclination towards leading, either as full formal partners of China or perhaps just more inclined, they tend to be much more interested. So, for example, we've seen recent deals by Middle Eastern countries.
We tend to see more attention and more enthusiasm for these types of countries, countries that we may see also that China has made much more an effort to engage with typically countries sometimes called the Global South.
What's surprising though, is increasingly.
As the UN has become more popular, we have seen even for example, France one of its companies, choosing to settle a trade deal in the UN as well.
What do you foresee? How long do you think before yon winds up becoming a significant currency that competes with the dollar, that competes with the euro for transactions all over the place.
I've asked a lot of traders what they think about this, and the answer I always care is it depends, and I get answers that go anywhere between ten years and one hundred or two hundred years. And I think the factor that really affects that is geopolitical, whether there we see this urgent need to create an alternative, and when we look at, for example, how important Russia's were in Ukraine has been to kind of pushing momentum for the use of the UN, you can see these type of
events can be critical in changing that balance. The percentage is very, very small so far, but if you have these sort of big geopolitical events, they can totally change the balance, and relatively quickly. We're talking about a year essentially of sanctions.
The one big.
Question, of course, is whether and how far the economic state craft agenda goes when it comes to the US and its allies. How far are the US and allies going to go when it comes to containing China as it would call it, and trying to curb China's influence.
In the world.
The more it does so, the more incentive there is for China into particular to really drive home that agenda, and of course all the countries around it that want to continue doing trade with it. I think the way China sees it is not necessarily a bipolar system, but a multipolar system where countries have much more autonomy and essentially, as they see it, are not under the thumb of the US. So there is this alternative to pit and there's a real alternative to pick. Of course, that point,
king dollar does still dominate. You don't really have a choice that you have to basically engage in US dollars if you want it to participate in the kind of global financial system. It's really that shift in balance that they want, not necessarily ultimately to be picking between one and the other. And I would imagine also there is some element in which ultimately there would be a desire.
For this to be more neutral.
You know, these sort of issues now have become politicized in a way that they haven't been in the past, and I suppose ultimately there perhaps would be this desire for Chinese policymakers for the use of the UN to not be seen in fact as a way of a mechanism of picking sides, but simply as a mechanism is simply of doing business in a world, a world in which China is much more powerful.
I suppose. In order for that to happen, it would require the US, it would require EU countries to accept you on as another currency. It couldn't just go one way, and we haven't seen much evidence of that happening.
No, And that again speaks to the sort of very small percentage of use by the UN so far internationally. Although we have seen these sort of sporadic deals mentioned for example, French deal, it's still very very small. Given the kind of context of US China relations, We're a ways away before seeing anything like that from the US, but even some of its allies and its partners have been relatively slow to engage in this too.
What would the economic effects for the US, for the EUB if the yuon started to encroach on the dollar's dominance and even the dominance of the euro.
It's a really hard question to answer, I think, because so much of that would depend on the pace and the scale and the reason why we saw that coming in if it was introduced in the context of some kind of sanctions, for example, being leveraged on China, and this really urgent desire to push an alternative that actually can function very quickly at the scale that China would need it to that of course, would be much more
challenging to the US. But if we're talking about something that's a much more gradual process and that's accompanied by some kind of raprochement in kind of geoplisical tension, too, we wouldn't necessarily see that happening. And in fact, some element of diversification, some element that kind of reduces the reliance on the dollar, also is potentially good for other developing nations.
You know. The whole point.
About having diversity is essentially not to be so vulnerable when the dollar moves and so on, and so there is also an argument to be made that of somewhat more diverse global settlement currency could actually help create a bit more stability in some of those emerging markets too.
So, Rebecca, this is obviously something that a lot of people are just keeping an eye on to see how it unfolds. As somebody who's covering in this what are you watching for.
I'm really watching to see whether the US or some of its closer allies start to be a little bit uncomfortable, start to feel like this is getting a little too close for comfort. Too many deals are being done. We don't really want to allow this happening at a moment when tensions between China and the US are so taught. So when you think about the G seven nations who recently met versus China and Russia and these alternative too
world orders, we do see this sort of polarization. We do this see this divergence, and that inherently does mean that what currency you choose is a political decision because.
Of the world that we're in now.
So I'm personally interested to see whether we see more of this dialogue enter into geopolitical discussions.
Rebecca, thanks so much for coming on the show. Thank you very much for having me, Thanks for listening to us here at The Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen, and we'd love to hear from you emails, questions, or comments to Big Take at Bloomberg dot net. The supervising producer of The Big Take is Vicky Bergerlan. Our senior producer
is Catherine Fink. Federica Romanello is our producer. Our associate producer is Zenebsidiki. Raphael mcili is our engineer. Our original music was composed by Leo Sidrin. I'm West Kasova. We'll be back tomorrow with another big take.