China Leverages West Asia Conflict for Yuan’s Global Payment Launch
China has long aspired to dethrone King Dollar. Beijing received its initial opportunity following Vladimir Putin’s invasion of Ukraine, as Russian lenders were removed overnight from the messaging system that facilitates global financial transactions. However, in 2022, the yuan was far from challenging the hegemon. It would require an additional four years of preparation — and yet another conflict — to establish it as a serious contender. I contended in early February that those seeking proof of the challenge to the US currency in payment flows were looking in the wrong direction. In the years ahead, de-dollarisation will continue to manifest subtly through modifications and enhancements to the financial infrastructure. However, that was prior to the conflict in West Asia. Significant transformations have occurred over the last six weeks. China stands as the foremost purchaser of Iran’s seaborne oil. The price that its refineries pay remains in “controlled accounts” at small Chinese banks that are excluded from dollar trade. The Atlantic Council states that these funds are allocated to compensate Chinese contractors or to finance imports, describing it as a “oil-for-goods” swap. Tehran has announced that it will accept toll payments from ships crossing the Strait of Hormuz in cryptocurrencies or the yuan. It represents a challenge to America’s financial dominance on three distinct fronts: the payment currency, the messaging system, and the settlement mechanism. If a peace plan were to lift US sanctions against Iran, the dollar could potentially restore some of the confidence it has diminished.
However, China’s currency is here to stay. It will patiently await the next geopolitical crisis. The dollar’s dominance is evident, accounting for nearly 50 percent of all international payments. The yuan’s share, as reported by the Society for Worldwide Interbank Financial Telecommunication, or Swift, stands at a mere 2.7 percent, a decline from its position in 2024. Yet China is earnest in its efforts to promote its currency as a viable alternative. The digital version, e-yuan, operates on the blockchain. The technology combines messaging, reconciliation, and asset transfer into one cohesive operation, circumventing Swift, the system through which the US monitors global financial transactions. Project mBridge, a digital platform shared by the central banks of China, Hong Kong, Thailand, the United Arab Emirates, and Saudi Arabia, has processed over $55 billion in trade, with the e-yuan representing 95 percent of the volume. However, the blockchain remains a minor component in the overall process of claims resolution. Most international transfers are directed towards a private institution in New York, recognized as the Clearing House Interbank Payments System, or Chips. Participants fulfill their obligations by utilizing pre-funded accounts at the Federal Reserve. All of them have US offices and are therefore subject to US law. Beijing’s unease is specifically centered on that issue. The US Department of Justice constructed its bank-fraud and wire-fraud case against Huawei Technologies Co.’s finance chief Meng Wanzhou by identifying dollar transactions that were routed through Chips in New York. In US law, the instant a digit representing a dollar interacts with a server on American soil — even for a millisecond — it bestows jurisdiction to the US government.
China has developed its own Cross-Border Interbank Payment System, or Cips, to bypass Chips, which clears payments in yuan. In March, as the Iran war intensified, Cips managed a remarkable 921 billion yuan ($135 billion) in average daily volumes, marking a nearly 50 percent increase from the prior month. While this represents only a small portion of the $2.2 trillion flowing through New York, the expansion of the alternative network is significant. The data reveals a significant transformation, driven by structural and geopolitical changes. In 2021, Cips operated as a subdued utility, with an average daily turnover of approximately 350 billion yuan. By early 2024, it had surpassed the 600 billion-yuan threshold. The catalyst was the executive order issued by Washington in December 2023, which authorized secondary sanctions on foreign banks that facilitate trade for Russia. In response to concerns over a complete disconnection from the dollar, banks in the UAE, Turkey, and Central Asia rushed to transition their settlement processes to the yuan. The mainland’s fragile domestic economy also contributed. Disinflation resulted in reduced onshore interest rates at the same time that the cost of borrowing dollars was increasing. The appeal of the Chinese currency in trade financing has been enhanced. Recently, banks in Hong Kong have doubled their permissioned access to onshore Chinese liquidity in response to robust client demand for yuan-denominated loans.
Last year, DBS Group Holdings Ltd.’s Singapore unit became an overseas direct participant of Cips. Banks connecting directly to Cips using its internal messaging protocol — bypassing Swift entirely — have increased by nearly 40 per cent since 2024, now totaling 193 institutions. With a mere 42 members, Chips, the New York club, embodies a heightened sense of exclusivity. As analysts Benn Steil and Yuma Schuster observed in a Council on Foreign Relations report last month, the decline in the yuan’s share in Swift payments data is misleading: It doesn’t indicate reduced usage; rather, it signifies that trade messages have transitioned to private channels and become less visible. In 2020, Syracuse University professor Daniel McDowell stated that the more the US exercises its unparalleled financial power, the less it may ultimately retain. Subsequent events have validated his perspective. Ultimately, if transactions related to 20 percent of the world’s oil and gas can flow through a digital conduit that eludes the scrutiny of the US Treasury, then the United States’ supremacy in global finance faces a significant deadline.
