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China’s Yuan Poses Challenge To US Dollar: India To Leverage Diversified Foreign Exchange Reserves To Increase Export Competitiveness – Analysis


According to Mr Ruchir Sharma, an eminent Global investor, “Spooked by the impact of US financial sanctions on Russia, many nations are looking  for ways to reduce dependence on dollar.“ There are perceptive changes in the movement of US dollar vis-à-vis Chinese Yuan in the central banks of the world. US  dollar pre-eminence is receding and the significance of Chinese Yuan is rising in the global foreign exchange reserves.  


According to an IMF report the share of US dollar in the world coffer of foreign exchange reserves is declining. IMF ‘s  Composition of Official of Foreign exchange Reserves ( COFER) revealed that notwithstanding  global foreign exchange reserves rose to US $ 12.85  trillion at the end of Q3 in 2021, the share of US dollar declined to 59.2  percent . 

The Big Four, viz. US dollar, Pound Sterling, Japanese Yen and Euro, holding dominant shares in world foreign exchange reserves, accounted for 98 percent per cent in 1999. This slipped to 92 percent in 2021. The report further revealed that other three currencies did not fill the gap. Instead, central banks of the world were diversifying their holdings for other non–traditional  currencies.  According to the IMF report, global holding of non-traditional currencies increased from negligible levels of 0.2 percent ( US  $ 30 billion)  in 1999 to around 9.1 percent ( US $ 1.2 trillion) by 2021. The major four in non-traditional currencies are Australian dollar, Canadian dollar, Chinese renminbi  (yuan) and Swiss Franc. They accounted for 71 percent of non-traditional currencies in global  foreign exchange reserves. 

The factors, which emerged potential to pawn Chinese renminbi a challenge to US dollar,  are China’s big share in global trade , viz, 15 percent in 2020 and  the power house for global manufacturing. It  accounts  for one –fourth of global supply chain.  Alongside, Russia insisting Ruble for oil trade – the second biggest exporter of oil in the world – in the wake of Ukraine war and rising Chinese Yuan in the Russian foreign exchange reserves – upstage the Chinese Yuan  a future currency for  global trade.  

By the end of 2020, Chinese Yuan emerged the largest component  of non- traditional currency in the global reserves. It accounted for  25 percent in the central banks globally. These demonstrate that Chinese renminbi is emerging fast as a  global currency for trade and  paves the way for de-dollarization in the wake of Covid 19 pandemic and Ukraine war. In 2016, Chinese Yuan became the first emerging market currency to be included in IMF Special Drawing Rights ( SDR) . Till that period, only  Big Four had the privilege to be in the SDR. 

Owing to increasing trade and political relations , Russia enlarged its monetary settlements with Chinese Yuan. Eventually, while share of Chinese Yuan in Russian holding  of foreign exchange reserves jumped from 12.8 percent in January 2021 to 17.1 percent in January 2022, share of US dollar halved to 10.9 percent from 21.1 per cent over the same period.


China has been the biggest trade partner of India over a period of six years, excepting in 2018-19 and 2020-21. India exports less and imports more from China. Notwithstanding oil and oil products being the biggest import items, China is the biggest import destination for India.  Nearly, one-sixth of India’s global import is generated from China, against  5-7 per of India ‘s export to China. Given these, it is imperative for  India to  export more to China to counter-balance its wide trade deficit. 

Currently, the total trade between India and China is exchanged through US Dollar per se. As the Chinese Yuan is not a global currency, it is more stable than US Dollar. Against  these backdrops, Yuan based payment mechanism can play an important role in increasing India’s export competitiveness.

A small rise in interest rate by Federal Bank spikes the US Dollar value and makes Indian products uncompetitive in  global market. Given the Chinese Yuan is less susceptible to global fluctuations due to changes in Federal interest rates, Indian products can be more competitive for exports to China and find wider space in Chinese market. Not only in Chinese market alone, but also in other Asian markets, who are exporting largely to China, India’s export competitiveness will increase if it is traded in Chinese  Yuan    

Exports  to Vietnam can be a case in point. The biggest items of  India’s imports from China are electric and electronic goods. They are the springboard for enlarging trade between India and China. Diagonally, China is the biggest trading partner of Vietnam. The biggest items of Vietnam  export to and import from China are electronic and electric items.  Incidentally, in the past few years Vietnam emerged a major exporter of electric and electronic goods to India.  It was the second biggest exporter of electric and electronic goods to India in 2020-21, after China. Given these dimensional changes in trade structures, the Chinese Yuan can reap increasing potential  to be the traded currency between Vietnam and India

RBI Governor accentuated the need for increasing non-dollar reserves in India’s  foreign exchange reserves. India already started this exercise in middle of 2021. 

Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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