China has mandated its largest banks to increase the usage of the yuan in trade with foreign partners, raising the required ratio to 40% from 25%, according to Bloomberg. This move by the People’s Bank of China aims to deepen the currency’s presence in global markets, particularly as countries explore reducing their reliance on the US dollar. While not legally binding, this change could result in penalties for banks failing to comply, impacting their ratings and service expansion ability according to Bloomberg. urthermore, this adjustment is part of Beijing’s broader effort to promote the yuan and reduce reliance on US financial tools amid heightened political tensions. The shift in trade practices comes as tariffs between China and the US remain a key concern, prompting both countries to implement new measures to manage trade. China’s central bank governor Pan Gongsheng noted that 30% of Chinese goods trade is already conducted in yuan, with total trade volume exceeding $6 trillion last year. Now, Beijing seeks to increase this percentage through a combination of policy and technical upgrades. This includes streamlining cross-border financial services, accelerating settlement systems, and providing businesses with better exchange rate tools. Banks are also offering lower fees for exporters and importers using the local currency. Businesses are responding favorably, as the onshore yuan has appreciated by 1.57% this year, trading near 7.187 per dollar. The shift toward yuan-based trade is driven by a growing desire to avoid the US dollar as a middle currency. Traders are increasingly seeking deals and hedging contracts in currencies like the euro, dirham, and Hong Kong dollars, while major banks are even setting up dedicated teams for such transactions in various regions. This trend goes beyond cost saving, reflecting broader concerns about the US dollar’s dominance in global trade. The decline of the dollar as a middle currency is gaining traction, particularly in Asia and the Middle East where China’s economic influence continues to grow. Companies are actively seeking alternative currencies for their transactions, including hedging contracts and loans denominated in yuan. This trend is not solely influenced by political tensions; it reflects a deeper structural shift towards a multi-currency system. The demand for yuan-based trade has been growing steadily since the beginning of 2023. The BRICS nations, with countries like Brazil and Russia, are advocating for reducing reliance on the US dollar. This momentum is fueled by concerns over sanctions following Russia’s invasion of Ukraine in 2022. China, through its CIPS system, has processed a significant volume of yuan transactions, exceeding 175 trillion yuan last year, demonstrating a shift away from traditional international practices. The world’s economic landscape is witnessing a gradual but profound change in the global use of currencies. This change could have significant implications for international trade and financial systems in the years to come.