Claims in Chinese yuan amounted to $336.1 billion in the fourth quarter of 2021, accounting for 2.79% of the total allocated foreign exchange reserves, the International Monetary Fund’s (IMF) survey showed on Thursday.
According to its Currency Composition of Official Foreign Exchange Reserves (COFER) data, the Chinese currency’s share has risen from 2.66% in the third quarter. By the end of 2021, the yuan was fifth in the COFER after the US dollar, the euro, the Japanese yen, and the pound sterling.
IMF experts have attributed the share growth to China’s economic rise and the yuan’s internationalization. They said renminbi’s growth will speed up this year amid sanctions between Russia and the West, and the global financial chaos.
Data showed that more than half of all central bank currency reserves are still held in US dollars. However, the greenback’s appeal is gradually declining. Thus, in 2007, about 70% of all central bank reserves were in US dollars, with the number dropping to 58.8% by the fourth quarter of last year.
Meanwhile, the scale of foreign exchange reserves in yuan is also gradually increasing. In the last three months of 2021, claims in renminbi in foreign exchange reserves amounted to over $336 billion, up from $320.1 billion in the third quarter last year.
Experts said the increase in the yuan’s proportion and scale is an irreversible trend, as the influence of the currency grows along with the rise of China’s economic power.
The prestige of the US dollar and the euro has been “greatly shaken” by anti-Russia sanctions, which now drive more and more countries to switch to national currencies in settlements with foreign partners, according to Dmitry Peskov, press secretary of the Russian President Vladimir Putin.
“Indeed, against the backdrop of these thug-like sanctions games, the prestige of the dollar and the euro has been shaken, most importantly, [the role of] the dollar as the main reserve currency,” Peskov said in an interview with Belarus-24 TV channel.
The Kremlin representative drew attention to the fact that more countries are turning to national currencies in their mutual settlements.
“This process is now at its initial stages, but it is no longer possible to stop it,” the official stressed, adding that the entire Bretton Woods system “that allowed America to be at the top of the economic pyramid of the world for many decades… is now beginning to erode.”
The Bretton Woods System created a collective international currency exchange regime, requiring a currency peg to the US dollar which was in turn pegged to the price of gold. It effectively made the US dollar the world’s main reserve currency. But now, according to Peskov, this system “will be completely washed away” as countries “transfer relations to national currencies, and this practice will expand.”
According to Peskov, the world will only profit from the fact that this mechanism is changing.
“There are a lot of options here, and this is all a prototype of the future economic system, the formation of which we are now witnessing,” he noted.
Although settlements in national currencies existed before, they were not widespread. However, last month a number of Western states, including most of the EU and the US, placed sanctions on Russia in retaliation for its military operation in Ukraine, launched in February.
As part of the sanctions packages, much of Russia’s foreign assets were frozen, while the country was also cut off from the SWIFT interbank messaging system, which jeopardized Russia’s ability to make settlements with foreign partners in euros and dollars. In response, Moscow last week announced that it is changing payment mechanisms for exports to ‘unfriendly’ states that slapped Russia with sanctions, starting with natural gas. Buyers now must set up ruble accounts in Russian banks, so that payments to Russian gas suppliers can be made in Russia’s currency, the ruble. Apart from that, Russia has been in talks with a number of its foreign partners, including India and Turkey, proposing to set up payment mechanisms in their respective national currencies in order to evade the dollar and the euro, whose reliability is now compromised.
Peskov said these steps are just the beginning of a broader change. While for now Russia is only changing the payment procedure for its natural gas exports and only with countries deemed ‘unfriendly,’ the move itself creates a precedent and can be mirrored in other sectors and with other partners.