The dominance of the U.S. dollar has historically given Washington a major advantage in policing global business. Most international transactions denominated in dollars must be settled by American banks, giving Washington the ability to monitor them—and cut off users’ dollars through sanctions if necessary, crippling their operations.
But U.S. adversaries are increasingly turning to China’s financial system and the yuan to conduct business. By bypassing the U.S.-led banking system, they weaken Washington’s enforcement powers.
China is building an alternative financial system around the yuan
Beijing in 2015 launched a payments platform—the Cross-Border Interbank Payment System, or CIPS—that serves as an alternative to Swift, the messaging infrastructure that links the world’s banks. Beijing is also promoting a platform, called mBridge, that uses blockchain technology and digital versions of existing currencies to execute transactions between central banks without the money passing through U.S. financial institutions. These and other steps by Beijing mean it is becoming easier for countries to trade and invest in yuan without relying on U.S. dollars.
Iran uses the yuan to sell oil and reap the benefits
In its latest deal with Iran signed last week, Washington agreed to temporarily waive some sanctions on Iran as the two sides hold talks over a possible long-term agreement to end Iran’s nuclear program. But Iran’s increasing use of the yuan in recent years has given it the ability to sidestep many U.S. restrictions, and keep earning billions of dollars a year—mainly by selling its oil to China—even when U.S. sanctions are tight.
China buys more than 90% of Iran’s crude, according to U.S. lawmakers, with most of it paid for in China’s currency. Instead of transferring yuan payments to Tehran, Chinese oil buyers often park the money with an entity that delivers funds to Chinese contractors that then perform engineering work in Iran, on projects such as airports and refineries.
China’s financial plumbing is used in the process
The Iranian oil proceeds often flow through CIPS, according to former officials and researchers. CIPS volume has surged since the U.S.-Iran conflict began. According to the Atlantic Council, daily volume averaged roughly 790 billion yuan, equivalent to $115 billion, in the three months following February, up from 680 billion yuan last year.
“For years, many countries wanted alternatives to the dollar system,” said Alisha Chhangani at the Washington-based Atlantic Council. China’s years of groundwork, she said, allows “technologies to be deployed at scale” that can make dollar alternatives more viable.
Source: livemint