China Advances in ‘Silent War’ Against US Dollar

In July, the central banks of China and Egypt signed agreements to promote the use of the yuan in trade and investment that would likely include a currency swap, yuan-denominated panda bonds, and cooperation on electronic payments, including expanding the use of the Cross-Border Interbank Payment System (CIPS), China’s alternative to the Western-led SWIFT international payment network. 

With the deal, Egypt joins a growing list of African nations that have yuan-based agreements with China, including South Africa, Nigeria, and Angola, which are all exploring or implementing the use of the Chinese currency for trade and financial transactions, wrote the South China Morning Post. 

But more significantly, with this push, China is quietly turning Africa into a financial battleground, the frontline in a “silent war” against the US dollar, according to the New Africa Channel, a broadcaster. 

“Forget aid, forget infrastructure – this time, it’s about power, monetary power,” it said. “Beijing is using Africa as the testing ground for one of its most radical global ambitions yet: to dethrone the almighty US dollar by pushing its own currency, the yuan, into every corner of international trade. Call it what you want – economic strategy or currency colonization – but the implications are massive.”

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After a virtual monopoly lasting three-quarters of a century, analysts say the US dollar is beginning to lose its position as the world’s singular reserve currency.  

Called de-dollarization, this phenomenon isn’t exactly new – China began shifting trade into the yuan in 2011. However, the current eruption, its magma oozing out slowly but steadily, could eventually reshape the foreign exchange landscape as much as the 1971 Nixon Shock, when US President Richard M. Nixon announced the end of the gold standard, says Jeffrey Garten, an economist in an interview with Yale Insights. 

The currency battle is the result of long-term trends, such as growing Chinese geopolitical ambitions, worry over the US addiction to public debt, combined with concerns over more recent policy measures, notably US President Donald Trump’s tariff threats and Chinese fears of getting hit with the kind of sanctions that the US has placed on Russia.  

Bypassing the SWIFT system allows countries to evade some sanctions. 

The US tariffs, in particular, have served as wake-up calls to world leaders who appear increasingly willing to hedge their dollar-denominated bets with some yuan side wagers as they push diversification. The list is topped by Iran, Russia, and Venezuela, all countries under US sanctions, but also includes US allies such as Argentina and Saudi Arabia.  

But it is Africa where China is making headway currently. For example, Nigeria has a currency swap agreement allowing direct exchange between the naira and the yuan without the use of dollars.  

Africa’s largest bank, the South Africa-based Standard Bank, is helping pioneer the use in Africa of China’s CIPS instead of SWIFT. (The Industrial and Commercial Bank of China holds a 20 percent stake in Standard Bank.) CIPS is already used by nearly 5,000 institutions across 187 countries and regions, according to the African Export-Import Bank.

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China’s incursion into Africa fills a niche once held by the United States, say analysts. For example, the Biden administration was unable to get lawmakers to extend the 2000 African Growth and Opportunity Act (AGOA), which provides duty-free status to many African products. The Trump administration is uninterested in it. If not renewed, the act will expire in September.  

Even if AGOA is extended, the tariffs would wipe out its benefits.  

At the same time, China recently announced that it would drop all tariffs on African imports.

Meanwhile, there are other reputable currencies, including the euro, encroaching on the dollar’s foreign exchange space. And other countries are considering alternatives: Recently, the Association of Southeast Asian Nations (ASEAN), a 10-nation trade bloc, committed to boosting the use of local currencies for trade and investment by the end of the decade.  

Still, analysts say that the yuan has the chance to be a true disruptor of the global system. The yuan may have a way to go to displace the euro or the dollar – it is the fourth most-used currency in global payments, while the US dollar makes up about half of global payments and more than 80 percent of trade financing. 

But China plays the long game, say analysts, and it is making headway, capitalizing on economic and political headwinds. 

“The US-dominated global monetary system is getting more and more fragile,” Tu Yonghong, a finance professor at Renmin University of China, told Reuters. “(China should) grasp this good opportunity.”