Published 21 May 2024
The dollar remains the most dominant currency in global trade finance and forex reserves. But geopolitical tensions and rising trade fragmentation are driving the slow but steady ascent of China’s renminbi. In a geopolitical landscape of rising bifurcation, money talks – and it is telling a story of two worlds drifting ever farther apart. Visual Capitalist shows what the currencies are telling us.
(Text by Chuin Wei Yap)
Global geopolitical tensions and the rising fragmentation of trade and foreign direct investment patterns are accelerating changes to the way the world makes cross-border payments and foreign exchange reserves.
The currency composition, long dominated by the US dollar, has been slowly but surely shifting. Dollar dominance remains undisputed as the global currency of trade and foreign exchange by a wide margin. It still accounts for some 89% of global trade finance by currency used, up slightly from 87% in 2013, as shown in a new graphic from Visual Capitalist and the Hinrich Foundation, based on analysis of data from the Bank for International Settlements. Mostly, that’s because most of global commodity trade continues to be invoiced and settled in dollars.
The greenback also accounts for nearly 60% of forex reserves despite the gradual diversification of global forex reserves away from the dollar and partly into non-traditional reserve currencies such as the Australian dollar and the Canadian dollar, the International Monetary Fund said in a May 2024 report.
But data on currency use in international trade and finance isn’t always easy to find and comes with longer time lags than trade figures, so it sometimes can be inaccurate, the IMF also warned in the same report.
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In the growing global bifurcation, those leaning toward the US won’t be feeling too much difference in the usage of the dollar in cross-border trade finance and forex reserves. But for those in China-leaning countries, the changes are more palpable.
As Visual Capitalist shows, China’s renminbi overtook the dollar in March 2023 as a share of China’s trade settlements, the first time in history. The renminbi, also called the yuan, at the end of March this year accounted for 53% of cross-border payments and receipts in the world’s second-largest economy. The dollar now stands at 43%, down from 83% in 2010.
Globally, the dollar’s share of trade finance payments also has declined since early 2022. At the same time, the yuan’s share has more than doubled, from around 4% to 8%, IMF data shows.
This is not only because Russia, at war with Ukraine and the West, has increasingly turned to China as a financial lifeline. The share of the renminbi in trade finance has increased across a wide swath of countries that aren’t considered to be squarely in the Western bloc. The yuan’s share of all cross-border transactions of Chinese non-bank entities with foreign counterparts was close to zero 15 years ago, but has risen to around 50% in late 2023, the IMF says. Meantime, the dollar has fallen from around 80% in 2010 to 50% in 2023.
Money talks. In a geopolitical landscape of rising bifurcation, it is telling a story of worlds increasingly drifting apart – one side is growing slowly but steadily, as the other is declining as it retreats from global trade.
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Visual Capitalist
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