China's yuan is tumbling amid US sanctions and as central banks boost dollar holdings

China's yuan is in the midst of a steep decline as holders of the currency eye the risk of US sanctions.

The value of the yuan slumped against Russia's ruble for the fifth day in a row on Wednesday, falling to a level of 11.51 rubles. That's the cheapest the yuan has been in about a year.

Central banks, meanwhile, are looking to dump the yuan while raising their holdings of the US dollar. Nearly 20% of central bank reserve managers said they planned on raising dollar holdings over the next one to two years, while 12% said they planned on reducing yuan holdings, according to a survey from the Official Monetary and Financial Institutions Forum.

Yuan holders are assessing the risk of Western trade restrictions on China after the US Treasury imposed secondary sanctions on countries and entities doing business with Russia's economy.

That puts China at particular risk, given that the nation become a key trading partner to Russia since Moscow first began its invasion of Ukraine in 2022. The two countries have embarked on a "no limits" economic partnership, which took their trade to a record $240 billion in 2023, according to data published by the Chinese government. They've also partnered on efforts with other BRICS states to phase out the use of the dollar, which has been nearly eliminated in China-Russia trade.

Lawmakers are reportedly already drafting sanctions to impose against Chinese banks, sources told The Wall Street Journal in April. If enforced, those sanctions could completely cut off some Chinese lenders from the global financial system, severely limiting the volume of trade and currency transactions.

China, for its part, has taken some steps to distance itself from Russia's economy. China's state-run banks are looking to restrict lending to Russian clients, due to fear of being targeted by US sanctions, people familiar with the matter told Bloomberg.