System connected with Asian countries bypasses the US currency -dominated SWIFT system; Transactions are made in Yuan (Chinese currency) and in only 7 seconds
China and its allies have taken another step in reducing global dollar dependence. In early April, the Chinese government tested with the United States a Bank transfer model using the Digital RMB (Renminbi), whose unit is the Chinese currency Yuan. The result was an operation without the need to pass through intermediate banks and which was completed in 7 seconds, a record between major transactions transactions.
The implication of this successful operation is the weakening of SWIFT-Banks created by banks from around the world in 1973 to allow currency exchange between different countries quickly and safely. Swift operations are done in dollars and euro, but the system takes 3 to 5 days to pay.
This is not the 1st financial operation with the Digital RMB. China and Asean countries (Southeast Asia) have been improving the system. Yuan transactions increased 120% from 2021 to 2024. The operation between Hong Kong and Abu Dhabi was the 1st in real time.
Lower rate
In addition to speed, another advantage of the Chinese model is the lowest administration rate of financial operations.
While in SWIFT the transaction is taxed by banks, the operation with Digital RMB uses blockchain tracking that makes it traceable and without the need to pass through intermediate banks. The result was a 98% drop in the administrative rate.
The Chinese system is also integrated with 16 other countries –10 of ASEAN (Southeast Asia) and 6 from the Persian Gulf. Currently they constitute a large portion of global trade. If the financial system continues to advance, it could become an area out of reach of the dollar and strengthen Chinese economic influence.
Here are the members of the payment system:
- Saudi Arabia;
- Bahrain;
- Brunei;
- Cambodia;
- China;
- Singapore;
- UAE Emirates;
- Filipinas;
- Indonesia;
- Iran;
- Kuwait;
- Laos;
- Malaysia;
- Oman;
- Qatar;
- Thailand;
- Vietnam.
Chinese currency wins
Despite the technical advantages, the Chinese system still faces a great challenge: the acceptance of the Chinese currency. To make these transactions, a currency swap agreement is required to exchange interest rates for interest rates – among the central banks of the countries.
In other words, the launch of the Digital RMB has paved the way for a faster payment system, but SWIFT is still favoring internationally traded coins such as the US dollar and the euro for settlement and compensation. Until the RMB is internationalized, the Chinese system will not be able to replace SWIFT.
Trade war between the US and other countries should strengthen the payment system led by China and result in increased use of digital RMB for international transactions. The consequence may be the loss of relevance of the dollar.
Recent efforts for use in coin business transactions from other countries, especially Renmimbi, have bumped into aversion to lack of liquidity. No one wants to accumulate reserves that will have limited use. But if the Chinese payment system prospers, it will be an increasingly used alternative to SWIFT, a system that is now used by 11,000 financial institutions from various countries. As the Chinese system uses the Digital RMB, it will be worth keeping reservations in this currency.
Geopolitical tension
One factor that can accelerate the internationalization of Digital RMB is the geopolitical tensions that were even more aggravated by US tariffs. Swift ban is a weapon used by the West to press your opponents. In 2022, a because of the invasion of Ukraine. This measure made Moscow, including the Chinese RMB.
With the tariffs imposed by the White House on their business partners, a similar movement can be. If negotiations between the US and other countries do not advance, it is possible that other nations migrate their reserves to the digital RMB and accelerate the internationalization of the Chinese currency.
What is Swift
Swift is the acronym of the worldwide interbenacial financial telecommunications company –Society for Worldwide Interbank Financial Telecommunication in English. It is a messaging system created by banks from around the world to allow currency exchange between different countries quickly and safely.
Created almost 50 years ago, SWIFT is still the most used system by banks for international transfers. Therefore, it is critical to the flow of transionic payments and international trade.
